Schlumberger Has A Solid Q2 As International Operations Shine

| About: Schlumberger Limited (SLB)

Schlumberger (NYSE:SLB), the world’s largest oilfield services company, released its second-quarter earnings on July 19, displaying an upbeat set of numbers that beat market expectations. The firm’s performance was largely driven by its international operations as well as strong activity in the U.S. offshore drilling space. Revenues for the quarter were around $11.18 billion, up from around $10.34 billion in the same quarter last year while income from continuing operations jumped to around $2.67 billion up from around $1.78 billion last year.

International Operations Fared Well

Schlumberger’s international operations account for around two-thirds of its total revenues, and this quarter turned out to be particularly strong for the business as global drilling activity hit 30 year highs [Reuters]. International revenues grew to around $7.7 billion up by around 12% from last year while income before taxes grew by around 21% to $1.69 billion.

The Middle East and Asia segment performed particularly well with revenues rising by around 27% to about $2.67 billion and income before taxes growing by around 47% year-over-year. While growth in Asia was led by higher land as well as offshore drilling in China and increasing activity in unconventional plays in Australia, the Middle East operations benefited from strong activity in Iraq and Saudi Arabia. We believe that the oilfield services market in Iraq could shape up to become one of the most important markets for oil field services companies going forward, given the country’s vast reserves and the lack of technical expertise required to harness them. While some contractors have been facing headwinds in the Iraqi market over the last year due to regulatory and other hurdles, Schlumberger indicated that its operations in the country continue to progress well with market share gains as well as increasing activity levels.

Schlumberger’s Europe/CIS/Africa operations did reasonably well with modest revenue and profit growth for the quarter. While activity in north Africa has remained subdued for much of this year due to security concerns, Schlumberger said that it has been witnessing an uptick in activity in Nigeria [Seeking Alpha]. The company expects to see more than 10% growth in international exploration and production investments this year, led by Asia and the Middle East. Offshore drilling is also expected to witness double-digit growth this year for both deepwater as well as shallow water rigs.

North America Remains Sluggish, But Activity In The Gulf of Mexico Continues To Rise

The gas drilling market in the U.S. continues to be weak with the the natural gas directed rig count falling to 18-year lows this quarter, although oil directed drilling and the U.S. Gulf of Mexico continued to perform well aided by higher activity and new technology deployments. Revenues from North America remained flat year-over-year at around $3.36 billion while income before taxes fell by around 4%. Pricing continued to be an issue in the U.S. market and the company mentioned that its drilling, stimulation and pressure pumping product lines faced tough pricing conditions, although it said that the rate of price decline was slowing.

The deepwater rig count in the Gulf is now 17% above pre-Macondo levels and the company said that activity in the region has increased by around 30% since last year. Schlumberger has been making a big push into the subsea technologies space. Subsea technologies, which involve placing the production equipment on the ocean floor is becoming increasingly important to offshore plays , as exploration moves to deeper waters and more harsh environments. The company recently began to operate its joint OneSubsea joint venture with Cameron International. We believe that the joint venture, which would combine Schlumberger’s knowledge of reservoir characterization and subsea processing with Cameron’s design and manufacturing capabilities, could help the firm further its presence in the Gulf.

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