Schlumberger Sets A Fast Pace

The world's largest energy services and equipment company Schlumberger (NYSE:SLB) has started the calendar fourth quarter earnings reporting cycle by setting a tough pace. Not only did the company report very strong revenue growth relative to expectations, but profitability was solid and guidance was rather encouraging.

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The Quarter That Was
On a reported basis, the fourth quarter was clearly a period of strong demand for Schlumberger's services. Revenue rose 32% sequentially and 58% annually and topped $9 billion. Even stripping out the acquisition of Smith, the year-on-year growth was about 15%. Profitability was likewise strong, with EBITDA growing 28% sequentially and 47% annually. Once again, even without the inclusion of Smith, the year-on-year growth in EBITDA and operating income would have been quite strong.

North America was clearly an area of strength for the company, as revenue jumped 27% sequentially - including a 24% increasing land revenue on top of 4% growth in rig counts. Operating income was likewise very strong (up 76% sequentially), even as the federal government's ban on Gulf of Mexico activity impacted earnings.

Around the rest of the world results were less scintillating. Revenue was up a bit in the Eastern Hemisphere category, while declining a bit in Latin America due largely to the Mexican market. (For more, see Oil Services Sector Powered By North America.)

The Road Ahead
Schlumberger managed mentioned that they expected international exploration activity to be a meaningful driver in 2011. It certainly follows that that would be a positive for Schlumberger as the company gets about 80% of its revenue from overseas and about 30% from exploration activities.

This would not seem to be just a 2011 phenomenon, though. What a lot of investors do not appreciate is how different the level of drilling activity is outside of North America. As of mid-January, there were 2,277 rigs chugging away in the United States and Canada (Baker Hughes (NYSE:BHI) doesn't report specifically on Mexico).

That is in sharp contrast to an "international" number of 1,118 for December of 2010. Even granting that the international number is probably not accurate (energy-producing regions with significant state involvement, like Saudi Arabia, are notoriously secretive about what they do), it is still a shocking discrepancy - and one that will shrink as prices rise and oil availability declines. That, in turn, is a multi-decade growth opportunity for Schlumberger, Halliburton (NYSE:HAL), Weatherford (NYSE:WFT), Cameron (NYSE:CAM) and any other energy services and equipment provider with a global footprint. (For related reading, check out Oil Service Stocks For Rising Oil Prices.)

Looking more at the short-term, 2011 is another one of those years with opportunities and challenges, but probably more weight towards "opportunities". Natural gas production might be an issue given the low prices of gas, but there are plenty of oil opportunities in places like the Bakken and it is not as though Chesapeake (NYSE:CHK), Ultra Petroleum (NYSE:UPL) or Cabot (NYSE:COG) are shutting down in the absence of high natural gas prices.

The Bottom Line
Schlumberger shares do not look all that cheap right now, but that is not too likely to matter. If oil prices stay high (or go higher still), it is probable that forward estimates go higher and investor enthusiasm pushes the stock up towards peak EBITDA multiples in the low teens. In other words, buying Schlumberger today is more of a momentum and secular positioning call than a value call. There's nothing wrong with that, particularly since valuing energy service stocks is hardly a science, but investors need to realize there is above-average risk here as a result. (For more, see Oil Services Still The Best Way To Play Crude.)

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