Schlumberger – A Look At Fourth Quarter 2011 Earnings

By Eric Fox | January 25, 2012 AAA

Schlumberger (NYSE:SLB) kicked off earnings season for the oil services industry with solid results that affirmed that the drilling cycle continued upward during the final quarter of 2011. The company's commentary and outlook for 2012 might be less reassuring for investors, as management seemed less certain that the cycle would continue to ascend this year. (To know more about oil and gas, read Oil And Gas Industry Primer.)

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Strong Growth
Schlumberger reported strong growth in both its North American and International operations. The company grew Oilfield Services revenues to $10.3 billion in the fourth quarter of 2011, up 8% sequentially and 21% year over year. It also reported higher operating margins in both its North American and International segments, with sequential margins up by 163 and 91 basis points, respectively.

The oilfield services giant did inject a degree of pessimism into its press release and noted the possibility of reduced business from operators active in dry gas plays due to plunging natural gas prices. It said that although recent surveys indicate higher customer spending in 2012, the company was ready for a less optimistic scenario and believed that "any potential reductions in activity will be short lived."

Schlumberger is also concerned about the possibility of a recession in Europe due to recent issues regarding sovereign debt in that region. It believes that although these issues will continue in 2012, a second recession is unlikely.

The company is forecasting that the North American rig count will be flat in the first quarter of 2012, as any reduction in natural gas drilling will be offset by growth in oil and liquids areas.

Pricing Rolling Over?
Schlumberger reported that the company experienced downward pricing pressure in its pressure-pumping business in the various onshore United States natural gas basins where it has operations. Although this should not come as a surprise to many investors, Schlumberger also reported that pricing in liquids-rich basins was "more or less flat" during the quarter.

Shareholder Friendly
The company remains shareholder friendly and announced a 10% dividend increase along with the fourth quarter of 2011 earnings. The company boosted the dividend by 10%, moving the annual payout to $1.10 per share. In 2011, the company raised its annual dividend by 19%.

Schlumberger also has an active share buyback program and bought back 9.2 million shares of its common stock at an average price of $69.42 during the fourth quarter of 2011. In 2011, the company repurchased 36.9 million shares at an average price of $81.15 per share.

Other Oil Service Companies
The next few weeks will see many other oil service companies report earnings reports. Baker Hughes (NYSE:BHI) has a large presence in pressure pumping in North America and reports earnings before the market opens on January 24, 2012. Management may provide additional information on pricing in North America during the company's earnings conference call.

Halliburton (NYSE:HAL) is one of the largest oil service companies and is active in both North American and International markets. The company is set to release earnings before the market opens on Jan. 23, 2012.

Weatherford International (NYSE:WFT) will be the last major oil services company to report earnings. The company has scheduled its conference call for Feb. 21, 2012.

The Bottom Line
Schlumberger believes that any drop in business from dry gas operators due to low natural gas pricing will be a quick one. The company is also sanguine about the possibility that recent problems in Europe will not spill over and materially hurt global economic growth. (For additional reading, check out A Guide To Investing In Oil Markets.)

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

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