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Schlumberger announces EPS of $0.88 per share

 Oilfield services giant Schlumberger (ticker: SLB) released its second quarter results yesterday, beating expectations substantially despite lower revenues. SLB announced adjusted earnings per share (EPS) of $0.88 per share, beating the consensus of $0.79 per share by 11%.

Schlumberger reported total revenue of $9.0 billion dollars for the quarter ended June 30, 2015, down 12% from the first quarter, and 25% from Q2’14 when the company reported revenue of $12.1 billion. The company’s lower revenue was due largely to the drop in rig count in North America, said Schlumberger CEO Paal Kibsgaard.

“Schlumberger second-quarter revenue decreased 12% sequentially, driven by the dramatic decline in North American land activity as the rig count dropped by a further 40% and as pricing erosions continued in both North America and the International Areas. North America revenue fell 27% sequentially, while International revenue was 5% lower as customer budget cuts and pricing concessions impact results for a full quarter,” he said.

Kibsgaard said that despite today’s price environment being even worse than the downturn in 2009, the company has been able to weather the storm more effectively. “Overall pretax operating margins were maintained at levels well above the previous downturns as we continued to proactively manage costs and resources, carefully navigate the commercial landscape, and further accelerate our transformation program. The success of our efforts can be seen in pretax operating margins of 10.2% in North America and 24.5% internationally while generating $1.5 billion in free cash flow, representing 132% of earnings.”

Schlumberger reported a year-over-year revenue drop of 26% in its North America section, and 14% in its international regions. The company delivered first-half decremental margins of 37% in North America and 18% internationally. “These results represent a marked improvement over the equivalent figures that were both in excess of 70% for the same period in 2009,” said Kibsgaard.

The reason for Schlumberger’s stronger results was better “[management of] costs and resources, carefully navigating the commercial landscape and further accelerating [Schlumberger’s] transformation program throughout the organization,” Kibsgaard said during the company’s conference call.

Despite the companies improved performance from the last down-cycle, the company’s Q2 release called for lower spending from North American E&Ps than in its first quarter release. Schlumberger expects spending to decline by more than 35% compared to more than 30% last quarter, with international spending expected to decline more than 15% compared to approximately 15% in last quarter’s release.

Markets tightening

During Schlumberger’s conference call, Kibsgaard said that he sees oil markets continuing to tighten, even as Iran prepares to export its crude oil internationally following the lifting of sanctions. “I would say that we are relatively confident in the tightening of the supply/demand balance for the second half of the year,” he said, “even with additional supply from Iran.”

Despite markets tightening, Kibsgaard does not expect prices to translate into much higher spending from E&Ps. “If we see some improvement in the oil price in the second half of this year, I don’t think there is going to be any huge impact on the current year budget, but I think it’s a positive indicator that we might have some increases next year.”

Analyst Commentary

Marshall Adkins, Raymond James 07.17.2015
Schlumberger (SLB/$83.89/Market Perform) announces strong 2Q beat as proactive cost management and international margin stability offset in-line declines in North America. Schlumberger reported 2Q15 EPS of $0.88, above both our estimate/Street at $0.80/$0.79 and also above the top end of consensus at $0.84. EBITDA of $2.56 billion also beat our/Street estimates, each at $2.44 billion. While revenues beat our estimate across all regions (total down 12.1% q/q vs. our estimate at 13.0%), margins - particularly internationally - drove the beat. International revenues (down 5.3% vs. our estimate down 6.5%) outperformed our expectations given strong Middle East activity, currency impacts in Russia, and a number of nations with relatively strong activity, partially offsetting declines particularly in exploration in offshore. International margins actually increased sequentially across all regions, far outperforming expectations of down 100-200 bp. Cost management, execution, and the company's transformation program were strong drivers for the margin performance both internationally and in North America. However, we note that the Reservoir Characterization was the only operating segment to see margin improvement, and this was largely attributable to increases in strong software and multi-client sales. North America saw large declines, particularly in pressure pumping and Gulf of Mexico activity, noting that pricing in some circumstances was at an unsustainable level and pumping equipment was stacked in certain basins to support margin maintenance. Bottom line: Impressive beat as Schlumberger beat across all regions on strong execution, cost management, and some higher margin sales. Given the proactive cuts and only 200 bp on North American margin decline, we expect investors to read through positively to the North American-levered names.

Ken Sill, GHS Securities 07.17.2015
Schlumberger Limited (NYSE: SLB; $83.89; Neutral; $100.00 PT) Q2 First Look: Substantial beat on costs
SLB posted earnings substantially above consensus estimates for the second quarter in a row, driven by cost cutting/efficiency gains from acceleration of its corporate transformation. SLB remains bullish on improving oil supply/demand fundamentals, however, its 2015 revenue outlook commentary is more negative than last quarter's commentary; calling for NAM E&P spending to decline by more than 35% vs. more than 30% last quarter, with international spending expected to decline more than 15% vs. approximately 15% last quarter. SLB thinks activity in NAM is bottoming and expects a slow increase in completion and drilling in the second half of 2015. The biggest surprise to us was a 36 bps sequential expansion in International margins despite a 5% decline in revenues. Margins benefited from an increase in high margin software sales and likely from increased multi-client seismic sales, which were up 58%/$31MM. We believe SLB's corporate transformation is bearing bountiful and likely sustainable fruit in the form of better than expected earnings.  

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