The world’s largest oilfield services provider Schlumberger Ltd. (SLB) has reported second-quarter 2011 earnings of 87 cents per share (excluding special items), beating the Zacks Consensus Estimate of 85 cents. The quarter’s results also improved from the year-earlier profit of 68 cents a share.
Income from continuing operations attributable to Schlumberger, excluding charges, was $1.18 billion—an increase of 45% year-on-year, helped by strong growth worldwide, along with the double-digit growth rates in all product groups.
Although, North America suffered from the extended Canadian spring break-up and poor weather in the northwest, pricing power in pressure pumping remained robust. Rest of U.S. land and a major contribution from deepwater operations contributed to the outperformance.
Revenue of $9,621 million also surpassed the Zacks Consensus Estimate of $9,198 million and experienced a significant 62% growth over the year-earlier figure of $5,937 million.
Segmental Highlights
Oilfield Services: Segmental revenues were up 51% year over year and 11% sequentially at $8,990 million. The pre-tax operating income was $1,750 million, up 56% year over year and 20% sequentially.
The growth can be attributed to improved WesternGeco marine proprietary surveys and multiclient sales, Wireline and Drilling & Measurements exploration activities, superior margin activity for M-I SWACO, higher SIS software sales as well as margin expansions in Bits & Advanced Technologies, Drilling Tools & Remedial and Pathfinder.
Distribution: Revenue for this segment increased 6% sequentially to $637 million. The pre-tax operating income also improved 8% year over year to $24 million.
Capital Expenditure, Balance Sheet & Share Repurchase
Schlumberger’s capital expenditure in the second quarter was $1,720 million. As of June 30, 2011, the company had approximately $4,933 million in cash and $5,745 million in long-term debt, representing a debt-to-capitalization ratio of 15.2% (versus 17.0% as reported in the previous quarter).
During the quarter, Schlumberger purchased 8.2 million of its shares for a total of about $706.7 million, at an average price of $86.27.
Outlook
Going forward, Schlumberger anticipates benefiting from demand improvement in select North American basins, as operators continue to focus on investing in exploring unconventional resources.
The oilfield services behemoth believes that bullish near-term U.S. land drilling trends, with activity driven by horizontal drilling and liquids-rich plays, will be supported by high oil prices.
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 technologically complex product and service offerings as well as its robust financial profile. Moreover, we believe the company will benefit in the next several quarters from the continued shift in drilling activity to liquids from gas and the restructuring of its U.S. land operations.
The current uptrend in oil prices is expected to encourage operators to maintain their spending levels. Moreover, the company’s long-term prospects remain positive, given its strong international footprint, particularly in Eastern Hemisphere.
The company’s competitor, Halliburton Co. (HAL), the second-largest member of the oilfield services contingent, also reported better-than-anticipated second quarter earnings, helped by the strength and sustainability of the all-important North American onshore activity levels.
However, Schlumberger's financial and operational performances face a number of headwinds, including changes in exploration and production spending patterns, commodity price fluctuations, geopolitical risks, regional spending trends, competition, the emergence of new technology and changes in economic conditions. Additionally, foreign currency fluctuation is also a threat to the company's profitability.
As such, we see the stock performing in line with the broader market and prefer to remain on the sidelines.
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