Schlumberger's 4Q Profit Soars - Analyst Blog

Schlumberger Limited (SLB) reported robust fourth-quarter earnings of 85 cents per share (excluding one-time items), substantially beating the Zacks Consensus Estimate of 77 cents as well as the year-earlier profit of 67 cents per share. The improvement was driven by strong activity in the liquid rich plays in North America and overall improvement in Canada. Full year 2010 earnings per share stood at $2.86, well ahead the Zacks Consensus Estimate of $2.77 and the last year's profit of $2.78.

The company's fourth-quarter revenue ramped up by more than 57% to $9.1 billion from $5.7 billion in the year-ago quarter, and surpassed the Zacks Consensus Estimate of $8.8 billion. Full year 2010 total revenue jumped almost 21% to $27.4 billion, beating the Zacks Consensus Estimate of $27.0 billion.

Schlumberger experienced a full quarter of activity from the previously acquired Smith International Inc., and the businesses contributed $2.49 billion to total revenue and $275 million of pre-tax operating income. The merger was dilutive to the fourth quarter earnings per share by 5 cents.

Segmental Highlights

Oilfield Services: In the fourth quarter, Oilfield Services revenue experienced a 16% year-over-year increase to $6.01 billion, while it increased 9% sequentially.

In North America, fourth-quarter revenue shot up 84% year over year to $1.60 billion. Pre-tax operating income in the region increased substantially to $385 million over the year. The sequential revenue improvement was led by higher U.S. land activity as well as the revenue growth in Canada that was partially offset by the slowdown in offshore activity, which affected Drilling & Measurements services. The US Gulf of Mexico revenue also showed a slight improvement in shelf activity and Completion Systems equipment sales.

Latin American revenue declined 7% year over year to $1.05 billion, while pre-tax operating income also slipped 2% year over year to $174 million.

Again, Europe/CIS/Africarevenue remains a drag and was flat year over year at $1.78 billion, while pre-tax operating income in the region decreased 12% year over year to $339 million.

Middle East and Asiarevenue climbed 13% year over year to $1.49 billion, while pre-tax operating income in the region rose 2% year over year to $434 million.

WesternGeco revenue grew 2% year over year to $560 million in the reported quarter but pre-tax operating income dipped 1% year over year to $113 million.

Fourth-quarter revenue decreased 4% sequentially in the M-I SWACO segment to $1.18 billion, while pre-tax operating income was up 6% at $149 million on a sequential basis.

Smith Oilfield recorded revenue of $729 million (up 11% sequentially) and pre-tax operating income of $106 million (up 54% sequentially).

Distribution's revenue hiked 5% in the quarter and pre-tax operating income surged 4% sequentially. The revenue growth was mainly driven by improved customer spending for line pipe projects and maintenance, repair and operating supplies in the U.S. shale markets. 

Balance Sheet

At the end of the quarter, Schlumberger had a cash balance of $5.0 billion and long-term debt of $5.52 billion, representing a debt-to-capitalization ratio of 14.9%. During the quarter, the company repurchased 6.1 million shares for $449 million at an average price of $74.14. Additionally, the company approved a 19% hike in its quarterly dividend to $0.25 per share.

Outlook

The company continues to hold a positive outlook for the year 2011 based on increased activity, coupled with higher technology needs of exploration, deepwater operations, and tight gas activity, particularly outside North America.

We believe Schlumberger's combination of balance-sheet strength, technological leadership and management depth should prove beneficial over the long term. We also believe the company is favorably positioned to benefit from the current trends in oilfield services, given improving operator spending and greater need for stimulation and completion of services in North America.

Although, North Sea, West Africa, and several Middle East & Asia GeoMarkets experienced improvements in the quarter, we remain concerned about the normal seasonal declines in Russia along with uncertain operations in Mexico.

Major competition from peers such as Halliburton Company (HAL) and Baker Hughes Incorporated (BHI) is also a concern. Halliburton and Baker Hughes are scheduled to report their fourth quarter results on January 24 and 25, respectively.

Hence, we prefer to remain Neutral on the company at this stage. Schlumberger holds a Zacks #3 Rank, which translates into a short-term ‘Hold' recommendation.

 
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