Schlumberger - A Closer Look At Second Quarter Of 2012 Earnings

By Eric Fox | July 24, 2012 AAA

The recent earnings report from Schlumberger (NYSE:SLB) may have partially allayed investor concerns that the North American land drilling cycle was rolling over due to lower crude oil and natural gas liquids prices.

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Second Quarter of 2012
Schlumberger reported earnings per share of $1.05 in the second quarter of 2012, compared to consensus estimates of $1 per share. While most headlines reported that the company's international businesses powered the quarter's results, the performance of the North American business was not as bad as expected and showed resilience in some areas.

North America
The company did admit to "weakness" in its hydraulic fracturing business during the recently ended quarter, but saw this trend moderated by "robust" conditions in other onshore oil service lines. It experienced stable pricing in its wireline, coiled tubing and drilling businesses in the onshore area during the quarter.

SEE: 5 Biggest Risks Faced By Oil And Gas Companies

It also reported that oil and liquids directed drilling activity in North America continued to increase in the second quarter of 2012, enough to offset the decline in dry gas development. The company said that it saw no sign that the drop in oil prices has impacted the growth rate of liquids directed drilling activity.

Hydraulic Fracturing
Not everything was rosy in North America as the company conceded that pricing and cost pressures would continue for hydraulic fracturing services in 2012. The company said that new contracts in liquids areas are currently being priced lower and leading to lower margins in this business for the third quarter of 2012.

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Oil Prices
One question that investors need answered is if oil prices continue to decline, at what price level would exploration and production operators start to reduce activity in various onshore oil and gas plays? Baker Hughes (NYSE:BHI) indicated during its earnings conference call that an oil price below $80 per barrel would start to impact drilling activity in North Dakota, where operators are developing the Bakken play.

Rig Count
North Dakota may already have seen a decline in drilling activity as the North Dakota Industrial Commission recently reported that 208 rigs were working in the state as of Jul. 18, 2012, down from the average of 213 rigs working in June 2012. The state reported a peak rig count of 218 on May 29, 2012.

Other companies set to report soon, that will have commentary on the current drilling cycle, include Halliburton (NYSE:HAL) and Weatherford International (NYSE:WFT). Halliburton is set to report before the market opens on Monday, July 23 and Weatherford after the market closes on July 24. Basic Energy Services (NYSE:BAS) is also another to watch, and the company reports after the market closes on July 26.

SEE: Why Crude Oil Prices May Not Affect Pump Prices

The Bottom Line
The North American drilling cycle is important to understand for investors that are active in the energy sector, and these investors should analyze earnings reports from other oil service companies set to report this week and incorporate this new information into their investment thesis.

At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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