The commentary by the management at Schlumberger (NYSE:SLB) during earnings season is being closely watched by investors as an indicator of the direction and strength of the drilling cycle, and remarks made with the first quarter of 2012 earnings release provided a mixed picture of recent business trends.
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Schlumberger disclosed that the decline in development activity in natural gas basins and a shift of capacity to oil and liquids areas accelerated during the quarter. The company also admitted that pricing weakness in natural gas areas has spread to the oil and liquids areas.
See: Natural Gas Industry: An Investment Guide.
Schlumberger is thus more cautious on North American activity during the rest of 2012 until there is more certainty on the ultimate trough in dry gas drilling activity and pricing on hydraulic fracturing services.
These trends were reflected in the company's financial results, where North American revenue declined on a sequential basis. The company reported revenue of $3.4 billion in the first quarter of 2012, down from $3.5 billion in the final quarter of 2011.
Other operators have also seen pricing weakness for hydraulic fracturing services in crude oil and liquids areas. Halliburton (NYSE:HAL) just reported earnings and said that this pricing pressure was most apparent in the Eagle Ford Shale in Texas.
Basic Energy Services (NYSE:BAS) also reported pricing weakness in the first quarter and said that increased competition in pressure pumping started to "pressure margins" towards the end of the quarter.
See: Understanding Oil Industry Terminology.
Schlumberger was more positive on international business trends and expects the rig count to grow by 10% in 2012. The company also reported stronger pricing on larger contracts as oil services capacity tightens in many areas.
It was also more positive on global economic growth and believes that the risk of a second recession has declined. The company also sees stabilization in oil demand in 2012 and limited growth in global supply due to a lack of spare capacity by OPEC and lack of growth from other countries.
See: Meet OPEC, Manager of Oil Wealth.
Schlumberger continued its stock repurchase binge in the first quarter of 2012, spending $324 million to buy back 4.4 million shares of its common stock during the quarter.
The company is also divesting some of its businesses and recently announced an agreement to sell its Wilson distribution business to National Oilwell Varco (NYSE:NOV). The company acquired this business when it purchased Smith International in 2010.
The Bottom Line
Schlumberger provided bullish and bearish investors with ammunition on the direction of the current drilling cycle in both the North American and international areas. Investors should look at future earnings releases from other oil service operators to establish their investment thesis in this sector in 2012.
See: A Primer on Offshore Drilling.
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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.