Schlumberger's International Operations Lift Growth And Outlook

| About: Schlumberger Limited (SLB)

Schlumberger (NYSE:SLB), the world's largest oil field services company, released its Q1 2013 earnings Friday, April 19. While the firm continued to face headwinds in the North American market primarily due to lower pricing, its international business performed well aided by growth in Asia-Pacific and the Middle East. Quarterly revenues grew by around 7% year over year to around $10.6 billion, while net income fell by around 3% to $1.26 billion.

Among the firm's product groups, reservoir characterization and drilling segments put up a strong showing thanks to better global offshore activity while the production group continued to face margin pressures due to a slow North American market. Here are some of the key takeaways from the firm's earnings release. (See also: "Here's What To Expect From Schlumberger In Q1.")

International Business Continues to Perform

Schlumberger's international business continued its strong run with revenues growing by around 13% year over year to $7.2 billion, while income before taxes grew by 21%, to around $1.5 billion. The division's performance outpaced the growth in the international rig count thanks to higher activity levels as well as some market share gains. Schlumberger expects global exploration and production spending to grow by around 10% this year and estimates that its international operating income will exceed this growth due to a favorable activity mix.

Asia-Pacific and the Middle East: This segment saw revenue and profits grow by around 21% and 28%, respectively, aided by strong activity in most parts of the region. In China, the firm continues to gain from offshore developments as well as complex conventional land based developments. China could also open up a significant opportunity for the firm in the unconventionals space as the country has auctioned several shale gas blocks, many of which were won by non-oil companies who will require expertise to unlock the reserves. The firm's performance in the Middle East was also strong aided by growing activity in Saudi Arabia as well as progress in Iraq and the United Arab Emirates. Saudi Arabian activity is expected to expand further with the rig count expected to touch 170 from current levels of around 140.

Europe, CIS, Africa: The Europe, CIS, Africa segment witnessed revenue and profit growth of around 11% and 19%, respectively, driven primarily by better results from Africa. While North African operations remained quite lackluster due to security concerns, countries in Sub-Saharan Africa performed well because of strong development and exploration drilling as well as Marine seismic operations in countries like Angola. Operations in Europe's North Sea, which is one of the world's largest and most sophisticated offshore drilling markets, were also encouraging as there was a transition from exploration to development and production-related work.

North American Pricing Remains Challenging

Revenues for Schlumberger's North American operations were down by around 4% year over year to around $3.3 billion, while income before taxes dropped by around 19% as a result of weaker pricing and maintenance related delays in the U.S. Gulf of Mexico. The North American rig count ended the quarter around 10% lower compared to last year due to a significant cutback in gas drilling in the U.S.

Pricing Continues to Weigh Down Results: The firm mentioned that pricing was the primary challenge in the U.S. indicating that the downward trend in drilling, wire line, and coiled tubing witnessed during Q4 2012, continued into the first quarter as well. The pressure pumping business also remained tough as U.S. gas drilling slumped to 14-year lows during this quarter. The prices for fracking services, which are used to stimulate shale gas and oil wells, fell by around 15% in the United States over the last year and are expected to fall by another 6% this year.

On the bright side, Schlumberger's North American operations have seen some progress with better drilling efficiencies, improvements in asset utilization and lower prices for certain raw materials such as guar gum, which are used in the fracking process.

Maintenance-Related Activity Hits U.S. Gulf of Mexico: The U.S. Gulf of Mexico has been a bright spot for the firm over the last few quarters helping to soften the blow of lower land-based drilling. However, in this quarter, although the number of active offshore rigs in the Gulf rose by nearly 10% year over year, activity in the region was temporarily slowed down by maintenance work on deepwater rigs. Since most of these issues have been resolved, it is unlikely to impact the firm going ahead.

Outlook Remains Uncertain for North America: While U.S. natural gas prices have recovered by nearly 20% over the last quarter to levels of around $4 per mmBtu due to colder weather, this hasn't resulted in an increase in dry gas drilling activity as many gas producers have scaled back on their exploration budgets. Schlumberger maintained a cautious outlook for North America indicating that pricing is likely to be the primary concern in the near term.

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