We maintained our recommendation on Schlumberger Limited (SLB) at Neutral on Oct 28, 2013. The company’s combination of a strong balance sheet, technological leadership and efficient management is likely to prove beneficial in the long term. However, foreign currency fluctuation is a threat to the company's profitability. Schlumberger carries a Zacks Rank #3 (Hold).
Why the Downgrade?
Schlumberger is favorably positioned to benefit from the current uptrend in oilfield services, given improving activity levels and the greater need for stimulation and completion of services in North America. Operating margin also improved for the region during the third quarter on a year-over-year basis, and the pace of growth is expected to enhance in the upcoming quarters on seasonally strong multi-client sales.
Schlumberger’s overall outlook for 2013 remains largely unchanged from its earlier projection. The company remains unperturbed despite some of the major emerging economies witnessing mixed fortunes in the third quarter. Demand for oil in 2013–14 is expected to remain strong while international natural gas prices remain steady.
Schlumberger generates about two-thirds of its revenues internationally, marking the highest ratio among the biggest oilfield service providers. Its strength also lies in effective implementation, strong contracts and new technologies.
In the international arena, the company experienced a strong 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, Middle East, Sub-Saharan Africa, China and Australia, in particular, are expected to be sources of strength in the coming quarters.
However, activity weakness in North America, where Schlumberger has a vast exposure, is likely to depress its share prices, going forward. Importantly, the continued weakness in pricing during the quarter as well as hydraulic fracturing-related work continues to face difficulty from overcapacity and will likely continue to decline this year.
Other Stocks to Consider
While we prefer to remain on the sidelines for Range Resources, Zacks Ranked #1 (Strong Buy) stocks – SM Energy Company (SM) and Abraxas Petroleum Corp. (AXAS) – and Zacks Ranked #2 (Buy) SandRidge Energy, Inc. (SD) could be good buying options for the short term.