The announcement of Schlumberger's third-quarter earnings revealed that revenues generated during the quarter amounted to $12.6 billion. Revenues had registered a 9% year on year and 5% sequential growth. The reason cited for this impressive growth in revenues was the increase in activity in the North American projects, with growth in Latin America and Europe/Africa/CIS activities pushing revenues from international areas up. This was further clarified when the geographical breakup revealed that Schlumberger's North American revenues were up 9% sequentially, while international revenues grew by 3% quarter on quarter.
The revenue growth trickled down to the lower tiers of the financial statement, leading to an impressive 14% annual increase in income from continuing operations, which amounted to $1.9 billion. Diluted earnings per share grew by 16% annually, and amounted to $1.49 for the third quarter. 13.9 million shares were bought back during the quarter, for a sum of $1.5 billion. Capex during the quarter amounted to $980 million, while the company made $519 million worth of dividend payments.
Schlumberger expects to report a sequential growth of $0.05-$0.07 in EPS for the fourth quarter which could mean that earnings could lie between the range of $1.54-$1.56 per share. This guidance is considerably low compared to previous earnings per share announcements. The company released a rather conservative guidance on account of the continued impact that the situation in Iraq, Libya and Russia would have on their operations.
What should be expected from the fourth-quarter results?
Analysts are banking on the announcement of earnings per share of $1.46 (10.6% annual growth), with revenues for the quarter amounting to approximately $12.72 billion (6.2% annual growth).
Given that Schlumberger has a history of outperforming estimates in terms of earnings per share, it is more than likely that the EPS announcement for the fourth quarter will be higher than expected by analysts. However, Schlumberger's outlook for EPS growth given in the third quarter seems to be over-optimistic when analysts' expectations are taken into consideration. Nonetheless, earnings will report a year on year increase during the quarter.
Baker Hughes reported a 5% year on year increase in the onshore well count during the quarter, pushing the total to 9,544 wells in the U.S. Due to this increase in activity, Schlumberger's drilling revenues are likely to report an increase, especially in the North American region. The key segment of reservoir characterization is likely to report a decline in its revenues, as it did on the previous quarter. Overall, there is a possibility that Schlumberger may fall short of meeting analyst estimates for revenues during the quarter, but will report an annual increase in revenues generated during the fourth quarter.
Moving into 2015
North American revenues are expected to show weakness in terms of growth during 2015 as it is expected that the number of rigs in the country will continue to decline during the year. 2014 was a year when the US reported explosive growth in the number of rigs. However, this number has reported continuous weekly decreases for the past three to four weeks, which suggests that more declines such as these could be expected during the course of this year.
Revenues are also expected to take a hit during the year as highly leveraged E&P companies will have more power in steering the rates they pay in the contracts they sign with oilfield service companies like Schlumberger. Given that E&P companies are trying to reduce their costs due to the mounting pressures of oil price declines, any new contracts signed this year by Schlumberger could include lower rates relative to contracts signed earlier, raising questions about how much the service company can profit from these contracts this year and in the years ahead.
The volatility in the oil market carried on into 2015 as well, and oil prices have declined by over 50% in the past 6 months. Goldman Sachs revised their estimates for Brent oil to $42 per barrel in its three-month forecast. This decline in oil prices is resulting in E&P companies cutting their capex spending. Moody's anticipates North American capex to decline by 30%-40% on average during 2015, while international capex could report a 20% decline in 2015. For Schlumberger this could mean fewer drilling contracts during the year. Schlumberger did however manage to sign a deal for a 4 year contract with Statoil a few weeks ago for drilling of 22 wells in the North Sea.
Moreover, there are chances that during the course of 2015, if the Baker Hughes and Halliburton deal falls through, Schlumberger could witness its market share in some areas like drilling services and artificial lifting decline in comparison to the newly formed company. This could therefore result in a slowdown in the growth rate of revenues generated by the company. Additionally, the merger of both companies could also lead to some competition in terms of valuation for Schlumberger, as the new formed company will be driven by the motive of increasing its valuation. For Schlumberger's investors, this would be an ideal opportunity for profit taking from their investments in Schlumberger, and purchasing shares that could provide them with higher P/E values in the years ahead.
As investors eagerly wait for the announcement of the fourth quarter results, analyst estimates and targets suggest that the quarter will be a successful one as it could report increases in growth of earnings. However, given that the oil sector is one that hardly anyone would find beneficial to be in at the moment, a good fourth quarter announcement could hardly make a dent in the stock price that has declined by 12.6% in the past three months. Shares now trade close to their 52 week low of $76.73, while they saw a high of $118.76 during the past 52 weeks.
Investors could see the share prices for Schlumberger remain bearish during 2015 as there are several negative factors that could lead to stock prices remaining depressed. Capital expenditure declines during the year are likely to hit Schlumberger's regionally diversified operations, which at one point was their strength. However, the stock is a good option for dividend seeking investors, as it offers investors a yield of 2%. Investors seeking capital gains might not benefit so much from this share since analysts are conservative about the share prices during the year, which are expected to border around the $98.62 threshold. Overall, the oil industry will remain volatile for the year, at least until oil prices settle down. Until then, Schlumberger shares could continue to trend downward following the trend of the industry.
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