The world’s largest oilfield services provider Schlumberger Ltd. ( SLB - Analyst Report ) has recorded second quarter 2012 earnings of $1.05 per share (excluding special items), beating the Zacks Consensus Estimate of $1.00.

The quarter’s results improved 22.1% from 86 cents earned per share in the year-earlier quarter and 9.4% from 96 cents earned in the prior quarter. The increase was aided by the strength in global exploration and deepwater activity as well as efficiency in operations.

Income from continuing operations, excluding charges, was $1,403 million, up almost 20% year over year and 8.3% sequentially.

Total revenue of $10,448.0 million beats marginally the Zacks Consensus Estimate of $10,447 million, and grew 16.2% from the year-earlier level of $8,990.0 million. Sequentially, total revenue grew approximately 5% in the reported quarter.

Segmental Highlights

Oilfield Services: Segmental revenues were up approximately 16% year over year and 5% sequentially at $10,448.0 million in the second quarter. Pre-tax operating income of $2,099 million soared 20% year over year and 8% sequentially.

All geographical areas registered sequential growth except North America, which was hurt by the Canadian spring break-up and the weakness in the U.S. land hydraulic fracturing market. However, the weakness in this area was partially mitigated by solid performance by other land operations and the U.S. Gulf of Mexico (GoM).

The sequential revenue growth was aided by the international markets, which exhibited a strong growth following a seasonal rebound of activity in Russia, the North Sea and China. Again, price improvements in seismic, wireline and drilling related product lines, both on land and offshore contributed to the growth.

Distribution: Recently, Schlumberger announced the divestiture of its Wilson distribution business and equity ownership interest in CE Franklin Ltd. Following these transactions, the company’s Distribution segment has been reclassified to discontinued operations. Hence, Schlumberger has restated all prior periods accordingly.

Capital Expenditure, Balance Sheet & Share Repurchase

As of June 30, 2012, the company had approximately $3,493 million in cash and short-term investments and $7,953 million in long-term debt, representing a debt-to-capitalization ratio of 19.4% (versus 20.6% as reported in the previous quarter).

During the quarter, Schlumberger purchased 7.5 million shares for approximately $499 million, at an average price of $66.30.

Company Outlook

Schlumberger remains upbeat about 2012, owing to the positive outlook for the international markets. The company expects an increase of more than 10% in its rig count in 2012 with robust exploration and deepwater activity. Schlumberger’s strength also lies in effective implementation, strong contracts and new technologies.

The oilfield services behemoth believes that balanced land portfolio and strong leverage to the deepwater segment will help it in performing well over the coming years. While the company makes most of its money outside North America, it suffers from the industry-wide weakness in U.S. hydraulic fracturing services.

Our Take

We maintain our long-term Neutral recommendation on the stock.

We like Schlumberger’s leading position in the global oilfield services market, along with its technologically complex products and service offerings and robust financial profile. Importantly, Schlumberger expects a boost in technological innovation throughout 2012, a rise in pricing of seismic and high seismic vessel utilization and a continuous shift toward performance-based contracts.

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, new technology and changes in economic conditions. Additionally, foreign currency fluctuation is also a threat to the company's profitability.

The company’s main competitor, Halliburton Co. ( HAL - Analyst Report ) − the second-largest member of the oilfield services contingent − is scheduled to report its second quarter 2012 results on July 23, 2012, before the opening bell.

We see Schlumberger performing in line with the broader market and prefer to remain on the sidelines.

Schlumberger shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.