We have maintained a Neutral recommendation on Schlumberger Limited (SLB) with a target price of $92.00 following the announcement of its second quarter 2011 results. Earnings of the company were well ahead of the Zacks Consensus Estimate and year-ago adjusted results.
Earnings benefited from an increase in revenue that was boosted by strong growth worldwide and double-digit growth rates in all product groups. Partial dampeners were the extended spring break-up in Canada and poor weather in the northwest.
Segmental revenues also showed significant improvement. Overall growth was 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.
Importantly, 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, horizontal drilling and activities in liquids-rich plays will be supported by high oil prices. Moreover, the company’s long-term prospects remain positive, given its strong international footprint, particularly in the Eastern Hemisphere.
However, we believe that the global gas market will be oversupplied in the absence of strong recovery in industrial demand, given the new liquefied natural gas capacity build-up in the industry along with the storage overhang in North America.
We also remain apprehensive about the rise in capital expenditure in 2011. Capex is expected to approach $4.2 billion in 2011, up 45% from $2.9 billion in 2010.
While the GoM tragedy has affected Schlumberger’s share performance, we expect the company to recover going forward. Schlumberger, which competes with Halliburton Company (HAL) and Baker Hughes Incorporated (BHI), holds a Zacks #2 Rank (short-term Buy rating).
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