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Schlumberger Beats EPS, Grows YoY

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The world’s largest oilfield services provider Schlumberger Ltd. (SLB - Free Report) reported third quarter 2012 earnings of $1.08 per share (excluding special items), beating the Zacks Consensus Estimate of $1.06.

The quarter’s results improved 12.5% from 96 cents per share earned in the year-earlier quarter and 2.9% from $1.05 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 $1,424 million, up almost 10% year over year and 3% sequentially.

Total revenue of $10,608.0 million in the quarter was up 11.1% from the year-earlier level of $9,546.0 million and approximately 2% sequentially. However, it missed the Zacks Consensus Estimate of $10,683 million.

Segmental Highlights

Oilfield Services: Segmental revenues were up approximately 11% year over year and 2% sequentially at $10,608.0 million in the third quarter. Pre-tax operating income of $2,142 million jumped 11% year over year and 2% sequentially.

All groups - Reservoir Characterization, Drilling Group and Production Group - registered sequential growth based on increased exploration, both on land and offshore as well as and strong deepwater activities.

Further, robust sales Artificial Lift and Completions products together with improved Schlumberger Production Management (SPM) project activity aided the Production Group to record a sequential growth, which was partly offset by lower Well Services revenue in North America.

Reservoir Characterization: This group posted revenue of $2,910 million in the third quarter, up 17% year-on-year and 5% sequentially. Pre-tax operating income was $838 million, which increased 38% from the prior-year quarter and 7% sequentially.

Drilling Group: Third quarter revenues recorded by this group was $4,048 million, which improved 13% annually and 1% sequentially. Pre-tax operating income was $733 million, up 21% year-on-year but down 1% sequentially.

Production Group: The revenue for the third quarter recorded by this group was $3,675 million, which climbed 6% annually but dipped 2% sequentially. Pre-tax operating income was $548 million, down 24% year-on-year and 11% sequentially.

Capital Expenditure, Balance Sheet & Share Repurchase

As of September 30, 2012, the company had approximately $4,760 million in cash and short-term investments and $9,397 million in long-term debt, representing a debt-to-capitalization ratio of 21.5% (versus 19.4% as reported in the previous quarter).

During the quarter, Schlumberger purchased 2.2 million shares for approximately $149 million, averaging $68.19 a share.

Company Outlook

Schlumberger remains upbeat about 2012, based on 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 perform 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 as well as weakness in the land coiled-tubing business.

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 the balance of 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 - Free Report) − the second-largest member of the oilfield services contingent − has reported in-line third quarter 2012 results, as robust results from its international business was offset by cost inflation. Earnings per share from continuing operations (excluding special items) came in at 67 cents, matching the Zacks Consensus Estimate.

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.

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