Schlumberger (SLM, Financial) is scheduled to reveal its first quarter results for FY2015 on April 16. The company, which competes with businesses such as Baker Hughes Inc. (BHI, Financial), Halliburton Company (HAL, Financial) and Weatherford International Plc. (WFT, Financial), is a giant in the oil services market and the seventh largest business by market cap in the energy index.
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Schlumberger reported 6% year-over-year growth in revenues to $12.6 billion in the fourth quarter of fiscal 2014 and a diluted non-GAAP EPS of $1.50 a share, up 11% compared to the prior-year quarter’s $1.35 a share. The company attributed the growth to record revenues of $4.3 million generated by its North America operations owing to enduring improvements in operational efficiency and new technology uptakes. The company also rewarded investors with a buyback of 12.1 million shares worth a total of $1.1 billion during the quarter and approved a 25% increase in dividend.
For the full fiscal 2014, Schlumberger logged 7% growth in revenues to $48.6 billion on the back of a 16% growth in revenues from North America. The results also represented a fifth successive year of revenue growth for the company. Concurrently, the company’s diluted non-GAAP earnings from continuing operations grew 17% to $5.57 a share compared to $4.75 a share in the previous fiscal. Schlumberger shares are up 13.6% since the company’s last earnings report.
Slowdown in Oilfield Activities Likely to Impact Top-lines
With oil prices falling to levels of around $57 a barrel, the cash flow of oil and gas companies has come under much pressure and oil producers, particularly those with a focus on North America, are expected to undertake cost-cutting exercises with major cutbacks in exploration budgets. Further, as weaker demand equips customers with better bargaining power, the oilfield services companies are also expected to feel pricing-related pressures. Experts are looking at a nearly 20% deflation in service costs.
North America, which has a substantially higher proportion of small and highly leveraged oil producers compared to the global market, saw a 27% year-over-year fall in average rotary rig count during Q1 2015. In comparison, the average rig count in the international market dropped by a much smaller percentage at 5.5% during the same period, with drilling activity registering year-over-year growth in certain regions such as the Middle East. Consequently, Schlumberger, along with its industry peers, is likely to witness an overall slowdown in oilfield activities. However, experts opine that Schlumberger’s lower exposure to the market in North America will prove beneficial to the company’s Q1 results, with revenues from international operations offsetting any losses in the domestic market.
Cost Realignment, Technology Uptake Likely to Boost Results
Considering the impact of pricing-related pressures, experts are looking at slimmer margins for the first quarter of fiscal 2015 for Schlumberger. However, the company has taken up several steps towards resizing and restructuring its business in the recent months, including reduction in capital expenditure, downsizing of workforce and scaling back on certain operations. The trend is likely to continue into the second quarter of fiscal 2015 and help pull back the margins eventually, as the company’s efforts start paying off.
Moreover, the current uncertain market environment has led to oil producers cutting back on investments in new discoveries as they realign their businesses to enhance productivity and flow rates at existing drilled wells. While Schlumberger is likely to witness decline in demand for services related to drilling and seismic activities, the trend is expected to boost demand for pressure pumping and other production-related services. The company is therefore likely to see robust uptake of its new products and technologies that help customers enhance the reservoir productivity.
Final Thoughts
Although Schlumberger posted strong fourth quarter and full fiscal results for fiscal 2014, the current volatility in the oil sector combined with the company’s reduced oilfield services activity and deflation in service costs is likely to hurt overall results for Q1 2015. That said, experts expect Schlumberger’s earnings to hold up better than industry rival Halliburton and Baker Hughes, owing to the company’s broader product portfolio and smaller exposure of its revenues to the North American market. Consensus for Schlumberger’s Q1 earnings is down from $1.20 to $0.92, while the revenue consensus has fallen from $11.57 billion to $10.44 billion for the quarter. The company’s shares have mostly traded in the $75-$85 range in the last three months, climbing up to around $89 in the run-up to the earnings date. With the market sentiment around the company as well as the overall energy sector being rather negative, the Schlumberger stock carries a price estimate of $88.36 a share and a ‘hold’ guidance.
