The world’s largest oilfield services provider Schlumberger Ltd. (SLB) reported weaker-than-anticipated first-quarter 2011 results. This was mainly due to geopolitical disturbances and typical seasonality factors in certain regions.
Earnings per share, excluding special items, came in at 71 cents, missing the Zacks Consensus Estimate of 76 cents. Revenue, at $8,716 million, was also shy of the Zacks Consensus Estimate of $8,959 million.
Though Schlumberger could not match the soaring profit gains posted by Halliburton Co. ( “>HAL ) – the second-largest member of the oilfield services contingent – it improved significantly from last year’s comparable period.
Compared to the first quarter of 2010, Schlumberger’s adjusted earnings per share improved 14.5% (from 62 cents to 71 cents) and quarterly revenue rose 55.7% (from $5,598 million to $8,716 million). This was driven by the strength and sustainability of the all-important North American activity levels, where the Houston, Texas-based company’s ‘Reservoir Production Group’ continued to make robust gains.
Segmental Highlights
Oilfield Services: Schlumberger’s ‘Oilfield Services’ segment revenues were down 4% sequentially but was up 45% year over year to $8,122 million. Segment pretax operating income was $1,455 million, a 14% sequential fall but an increase of 40% from the year-earlier level.
The decrease from the previous quarter can be attributed to abnormally seasonal weather (in U.S. and Australia) and disruptions in the Middle East/North Africa markets. However, buoyed by increased demand and pricing gains for the ‘Reservoir Production’ group, segment results recovered from the year-earlier levels. Excellent performance at Integrated Project Management (IPM) Well Construction (particularly in Iraq) also contributed to the performance.
Distribution: Beginning with the first quarter of 2011, Schlumberger has started to report its ‘Distribution’ business as a separate and distinct segment. Revenue for this segment increased 4% sequentially to $601 million. Pretax operating income also improved from the fourth quarter of 2010, up 7% to $22 million.
Capital Expenditure, Balance Sheet, & Share Repurchase
Schlumberger’s capital expenditure in the first quarter was $770 million. As of March 31, 2011, the company had approximately $4,163 million in cash and $6,422 billion in long-term debt, representing a debt-to-capitalization ratio of 17.0%. During the March quarter, Schlumberger purchased 9.7 million of its shares at an average price of $87.18 for about $844 million.
Outlook
Schlumberger’s management pointed out that first quarter profitability suffered from the turmoil in the Middle East/Africa, and extreme weather conditions in the U.S. and Australia, which were partially offset by strong demand for its services in North America.
Going forward, Schlumberger anticipates benefiting from demand improvements in select North American basins, as operators continue to make the exploitation of unconventional resources the focus of their investment.
The oilfield services behemoth believes that bullish near-term U.S. land drilling trends – where activity is being driven by horizontal drilling and liquids-rich plays – will be supported by high oil prices.
At the same time, the company expects activity in the Gulf of Mexico and Middle East to progressively mobilize over the next six months.
Our Recommendation
Schlumberger shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
We like Schlumberger’s lead position in the global oilfield services market, along with its broad and technologically-complex product and service offerings, and its robust financial profile. Since the last few quarters, the company has been benefiting from increased activity in the unconventional oil and gas shale plays in North America, which have more than made up for the drop in deepwater Gulf of Mexico activity.
However, the oilfield services sector’s biggest player continues to feel pressure from intense competition in the market, depressed natural gas prices and the expected curtailment in incremental drilling projects.
As such, we see the stock performing in line with the broader market and prefer to remain on the sidelines.
HALLIBURTON CO (HAL): Free Stock Analysis Report
SCHLUMBERGER LT (SLB): Free Stock Analysis Report
Zacks Investment Research
