Schlumberger Hurt By Cheap U.S. Natural Gas

Apr.22.12 | About: Schlumberger Limited (SLB)

The Schlumberger Limited (NYSE:SLB) first quarter earnings conference call raised some interesting questions on the balance of 2012 prospects for the world's largest oilfield services company. The reported earnings of 98 cents per share was right in line with the consensus estimate - 97 cents - and a 38% improvement over the 2011 first quarter earnings. Revenue and earnings were down from the 2011 fourth quarter, but most of the drop was due to seasonal trends.

The areas of discussion and interest fall into two major categories: A slowdown in drilling and well pumping operations for land-based North American operations and stronger growth potential for international operations.

In North America - primarily the U.S. - the very low price of dry natural gas has led to a significant slowing of drilling and pumping operations for gas exploration. Horizontal drilling assets are shifting to natural gas liquids plays. The shift is resulting in lower revenues and prices for Schlumberger, both through the costs to transfer equipment and the lower pumping horsepower requirements in liquids exploration. From the 2011 fourth quarter to the 2012 first quarter, North America revenues declined by 3% and operating income dropped by 18%.

Internationally, the company is projecting a 10% increase in rig count - a positive for Schlumberger's business. Much of the discussion on the conference call concerned whether the increased activity would produce pricing improvements. Management indicated initial steps were underway to try to push up pricing, but there was not yet any indication of a trend towards better prices for the company's services. The questions from Wall Street analysts were almost entirely focused on the prospects for revenue and price improvements from international operations. The management answers were very non-committal on the prospects for growth results.

An interesting question concerned the effects of the takeover of YPF Sociedad Annima (NYSE:YPF) by the government of Argentina. The response was that Schlumberger considers Argentina to be an attractive market for the company's services. Equipment is already in-place in the country, which is a benefit, since recent import restrictions now make it very difficult and time consuming to move additional equipment into the country. Argentina is considered to be one of the next big plays for the use of horizontal drilling techniques.


In the first quarter, North America accounted for 34% of revenue and 40% of operating income. There was no indication where the bottom would be for slowing results from the region. It is very possible the reduced revenue and profits from onshore services in North America will be greater than any positive results from the rest of the world. Schlumberger's business is very cyclical and the cycle in North America has turned down and the rest of the world has not yet turned strongly upward. A cyclical downturn of the share price appears to be the higher possibility. The 2012 second quarter revenue and profit results are forecast to be about 5% better than in the first quarter. If the actual results fall short, it will be an indication of downward cyclical pressure on Schlumberger's businesses.

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