Contrary to many expectations a year ago, the oil services business didn't see much improvement in 2012. While Schlumberger (NYSE:SLB) is probably the best in the business, even it couldn't escape the realities of tough demand conditions in North America. With pricing weakness spreading in North America, can the international business grow enough in 2013 to lead to better results and multiples for this company and the broader sector?

SEE: A Guide To Investing In Oil Markets

A Tough Fourth Quarter, but Some Bright Spots
Schlumberger warned investors a little while ago that this quarter would come in below prior expectations, and seemingly the whole sector followed suit. Consequently, investors were prepared for bad news, and Schlumberger managed to deliver a little optimism.

Revenue rose 8% from last year and 5% from the third quarter, fueled by 13% and 6% growth in the international business that offset mixed performance in North America (down 3% annually and up 4% sequentially). North American results benefited from better deepwater activity in the Gulf, while business in Latin America (up 11%) benefited from Mexico. Business in the Mideast (up 10%) benefited from project startups in Iraq.

Results weren't as positive below the top line, as the company continues to deal with higher costs. North American profits improved 7% sequentially, and operating margin improved sequentially by more than half a point - potentially setting a challenging bar for Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI). Profits were less impressive outside the U.S., as operating income rose 1% and margins fell one point from the third quarter.

SEE: A Primer On Offshore Drilling

North America Still Looks Challenging
Weak activity and pricing in pressure pumping and coiled tubing is old news, and it has been an issue for the major service companies for some time. The new bad news is that some of that weakness has spread into directional drilling and wireline services.

Many problems in the North American market need to be resolved for Schlumberger to see a good year. Low gas prices gutted production and exploration activities there, while steep differentials in landlocked areas have pressured even some liquids producers. Making matters worse, many investors have shifted from a philosophy of "drill, baby, drill" to "a penny saved is a penny earned" and encouraged companies to curtail their capital budgets and drilling programs.

Can International Carry the Day?
The good news for Schlumberger is that it gets quite a bit more of its business from outside North America than within, and the margins have improved. Activity should continue to pick up in sub-Saharan Africa, Norway, China, Australia and Russia, and that should support good business trends.

Schlumberger is also moving forward with more offshore business development. The company formed the One Subsea venture with Cameron International (NYSE:CAM) to create a compelling subsea production partnership. Near-term contributions are likely to be modest (particularly given disappointing equipment order announcements in 2012), but this could be an important unit over the next decade (Credit Suisse's analyst compared the combination to "Oreos and milk").

SEE: ETFs Provide Easy Access To Energy Commodities

The Bottom Line
How you see Schlumberger's value today has a lot to do with how you see the near-term future for the services industry. Historically, this stock trades at an average forward EBITDA multiple of 9.5 times, but it does drop to around six times or so in bad times. If you think conditions will gradually improve in 2013, you could argue for an 8.5 times target, but that still only gets you to about $76 in fair value - not a very compelling target versus today's price. Move the multiple to 9.5 times and you get an $85 target, to say nothing of the potential for upward revisions if a bullish 2013 scenario materializes.

I like Schlumberger fine as a company, but I can't get bullish enough on the outlook for services demand to use a multiple here that leads to an attractive price. Consequently, I'll be sticking with a "watch and wait" outlook on this stock.

At the time of writing, Stephen D. Simpson owned shares of Cameron since 2012.

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