We are maintaining our Neutral recommendation on Schlumberger Limited (SLB). We prefer to remain on the sidelines mainly due to the anticipated short-term profit disruption from the political turbulence in the Middle East and Africa and weather-related hindrances in Australia.
In the fourth quarter of 2010, the company substantially surpassed our estimates, mainly attributable to strong activity in the liquid rich plays in North America and overall improvement in Canada. Notably, it’s Oilfield Services revenue grew 16% year over year on an 84% revenue growth in North America.
The improved performance was led by higher U.S. land activity as well as revenue growth in Canada that was partially offset by a slowdown in offshore activity, which affected Drilling & Measurements services. The U.S. Gulf of Mexico revenue also showed a modest improvement in shelf activity and Completion Systems equipment sales.
We believe the company is favorably positioned to benefit from the current trends in oilfield services, given the combination of balance-sheet strength (with a debt-to-capitalization ratio of 14.9% at the end of 2010), improving activity levels and greater need for stimulation and completion of services in North America. Looking ahead, Schlumberger remains optimistic on increased activity, along with higher technology needs for exploration, deepwater operations and tight gas activity, particularly outside North America.
Additionally, Schlumberger’s long-term prospects remain encouraging, given its strong international footprint, particularly in the Eastern Hemisphere. In the international arena, we expect activity levels to increase in 2011, particularly in Brazil and West Africa. There is also some potential upside in East Africa and remote Indonesia.
However, our positive view is slightly tempered by the company’s announcement last month that political instability in Egypt, Tunisia and Libya has hit hard its revenues for the March quarter. Disruptions in Ivory Coast, Yemen, Bahrain, Oman and Algeria also had a minor impact on the company’s earnings. Consequently, all these will likely affect first quarter 2011 earnings by 8 cents to 10 cents per share. Although the company did not specify any earnings guidance for the first quarter of 2011, we expect it to post earnings of 80 cents a share.
Schlumberger’s competitors, Weatherford International Ltd. (WFT) and Halliburton Company (HAL), also narrowed their earnings forecast for the first quarter of 2011 citing the same reasons.
The quantitative Zacks #3 Rank (short-term Hold rating) for Schlumbergerindicates no clear directional pressure on the shares over the near term.
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