- Quick Take
- Schlumberger is expected to release its Q1 results on April 19.
- We expect the firm’s performance to continue to be weighed down by weak North American gas drilling.
- Rig maintenance related delays in the U.S. Gulf of Mexico could also hit results.
- Vast international exposure should help to soften the U.S. drilling slump.
Oilfield services bellwether Schlumberger (SLB) is expected to release its Q1 2013 numbers on April 19, reporting on a quarter that saw the U.S. natural gas rig count drop to 14 year lows. In Q4 2012, the company’s revenues grey 5% sequentially to around $11.1 billion while profits declined by around 3% due to setbacks in the U.S. land drilling market and the international market.  We expect the firm’s revenues and profits to continue to be weighed down by sluggish activity in North America and also due to some short term delays in its U.S. offshore operations.
Lower North American Land Activity Despite Rising Gas Prices
Drilling activity in North America has been sluggish for some time now as low gas prices caused gas directed activity to plummet from around 726 active rigs (both U.S. and Canada) to around 464 active rigs over the past year. Even though oil directed drilling has increased from around 1,437 to 1,474 rigs, it hasn’t been enough to offset the gas drilling plunge. This has adversely impacted pricing, especially for production enhancement services such as pressure pumping, due to the oversupply of capacity in the market.
Although U.S. natural gas prices have recovered by over 20% over the last quarter to levels of around $4 per mmBtu, many gas producers have cutback on their exploration budgets since they will be able to meet production from existing wells in the near term. If gas prices continue their uptrend and demand remains strong, we could see a reversal in the declining gas rig count.
Maintenance Delays In U.S. Offshore Could Hit Earnings Temporarily
The U.S. Gulf of Mexico was a bright spot in Schlumberger’s North American operations for much of last year as it helped to soften the blow of lower land-based drilling. The number of active offshore rigs in the Gulf has risen by nearly 10% over the last year. However, the firm mentioned that first quarter activity in the region was temporarily slowed down by maintenance work on deepwater rigs. While this could hit Schlumberger’s Q1 performance, we only view this as a short term setback. 
International Business Is Poised For Growth
Among the U.S. oil field service firms that we cover, Schlumberger has the greatest exposure to the international market with nearly two-thirds of the firm’s revenues coming from outside North America. For 2013, Schlumberger expects that exploration and production budgets for global oil companies will grow by around 10%, with its international operating income outpacing the growth in industry spending due to its favorable activity mix. 
Venezuelan Payment Issue Resolved
Schlumberger’s Venezuelan business was viewed as the key negative factor in the firm’s international operations during the quarter. About a month ago, Schlumberger mentioned that it was slowing down its work and revenue recognition in Venezuela, since it was having trouble collecting payments from the state-controlled oil firm Petroleos de Venezuela SA (PDVSA). However, last week the firm mentioned that it had worked out an agreement with PDVSA to collect its dues and indicated that it would be recognizing revenues associated with its all its Q1 activity, besides planning to scale up activity in the country.
We have a $88 price estimate for Schlumberger, which is around 20% ahead of its current market price.
Disclosure: No positions