Schlumberger Remains Evenly Poised

We are maintaining our long-term Neutral recommendation on Schlumberger Limited ( SLB - Analyst Report ) , a leading oilfield services company that providestechnology, project management and information services to the global oil and gas industry.

Schlumberger recorded better-than-expected second quarter profit, which surged 22.1% from the year-earlier quarter and 9.4% sequentially. The company was bolstered by strong performances in global exploration and deepwater activity, as well as efficiency in operations.

In the international arena, offshore growth andcertain land markets strengthened the company’s second quarter results. Latin America, the Middle East and Asia showed solid progress, while the Europe/CIS/Africa region registered the top performance. Moreover, the international shale opportunity continues to develop, and we expect it to be a significant opportunity for Schlumberger. We believe Saudi Arabia, Australia and China have the best prospects at the moment.

The company continues to expect the international rig count to grow by more than 10%. Service capacity continued to tighten and Schlumberger is successfully pushing pricing on small contracts through technology upgrades.

We believe Schlumberger is favorably positioned to operate within the current oilfield services scenario, given theincreased international drilling activity, pricing improvements and an expected recovery in its seismic operations. Schlumberger should also benefit from its oil-driven international growth prospects, given its leading position in exploration drilling.

However, weak natural gas prices haveimpacted the demand for gas-directed activity in North America. As Schlumberger has a vast exposure in the region, its share prices may be depressed going forward. Importantly, the second quarter registered deterioration in growth and profitability from the North American market as gas-based activity continued to decline. Hydraulic fracturing-related work continues to face difficulty from overcapacity and will likely continue to decline this year.

While Schlumberger − which ranks ahead of Halliburton Company ( HAL - Analyst Report ) as the biggest member of the oilfield services contingent − hopes to gain market share against its peers in 2012, we expect pricing and margins to remain restricted in North American pressure pumping.