We reaffirmed our Neutral recommendation on leading oilfield services company, Schlumberger Limited (SLB), on Aug 7, 2013. The company sailed past estimates in the second quarter aided by international exposure, its focus on execution and integration capabilities. The company holds a Zacks Rank #2, which is equivalent to a short-term Buy rating.
We believe Schlumberger's combination of a strong balance sheet, technological leadership and efficient management will be beneficial in the long term. We also believe that the company is favorably positioned to benefit from current trends in oilfield services, given improving activity levels and greater need for stimulation and completion of services in North America. Although operating margin slipped for the region during the second quarter on a year-over-year basis, the pace of deterioration is expected to slow down in the upcoming quarters led by seasonally strong multi-client sales. While hydraulic fracturing pricing and land drilling activity remain depressed throughout North America, this was more than offset by strength in the Gulf of Mexico (GoM).
In the international arena, the company experienced a strong second quarter and we expect activity levels to increase and enjoy healthy growth throughout 2013. Schlumberger expects its international spending on exploration and production to climb 10% this year. The company is aiming for continued margin improvement underpinned by the Middle East/Asia and Europe/CIS/ Africa regions. Russia and Australia, in particular, are expected to be sources of strength in the coming quarters.
Schlumberger’s overall outlook for 2013 remains largely unchanged from its earlier projections. The company remains unperturbed despite the main economies including China, the U.S. and the Euro zone witnessing mixed fortunes in the second quarter. As a result, both oil and gas prices also are following a sideways trend in pricing, reflecting the mixed nature of the global economy.
Looking forward, Schlumberger’s optimism on rising rig count and customer activity will likely lead to its increased international spending on exploration, higher production and stepped up activity in the U.S. GoM. The company also expects steady growth in key regions that include Sub-Sahara Africa, Russia, the Middle East, China and Australia.
Schlumberger generates about two-thirds of its revenues internationally, marking the highest ratio among the biggest oilfield service providers, which include Halliburton Company (HAL) and Baker Hughes Inc. (BHI). Schlumberger’s strength also lies in effective implementation, strong contracts and new technologies.
The oilfield services behemoth believes that strong leverage to the deepwater segment will help it to perform well over the coming years. While the company makes most of its money outside North America, it bears the brunt of industry-wide weakness in U.S. hydraulic fracturing services as well as softness in the land coiled-tubing business.
Other Stocks to Consider
There are other stocks in the sector that appear more rewarding. These include Pembina Pipeline Corporation (PBA), which is expected to perform impressively over the next few months and carries a Zacks Rank #1 (Strong Buy).
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