Balanced View on Schlumberger - Analyst Blog

We have maintained our Neutral recommendation on Schlumberger Limited SLB on May 5, 2014. The company carries a Zacks Rank #3 (Hold).

Why Maintained?

Schlumberger's strong balance sheet, technological leadership and efficient management are expected to drive growth in the long term. We also believe that the company is favorably positioned to benefit from the current trends in oilfield services, given the improving activity levels and greater need for stimulation and completion of services in North America.

Although the company's operating margin in the region fell marginally during the first quarter on a year-over-year basis, the pace of growth is expected to pick up in the coming quarters on seasonally strong multi-client sales.

Moreover, Schlumberger's efforts to increase its capacity in pressure pumping and strengthening of deepwater activity in the GoM are likely to boost revenues going forward. While hydraulic fracturing pricing and land drilling activity remained depressed throughout North America, this was more than offset by the company's advanced technology, internal efficiency gains and size.

Schlumberger's overall outlook for 2014 remains largely bullish on an improved global economic scenario. Notably, the company remained unaffected even though some of the major emerging economies witnessed mixed fortunes in 2013. Demand for oil in 2014 is expected to remain strong and international natural gas prices will likely be steady as well.

Looking ahead, Schlumberger's optimism regarding rising rig count and customer activity will expectedly increase its international spending on exploration, production and activity in the U.S. GoM.

In the international arena, the company experienced a strong quarter and we expect activity levels to increase throughout 2014. Schlumberger expects its international spending on exploration and production to climb over 6% in 2014. The company is aiming for a consistent margin improvement primarily on the back of its performance in the Middle East/Asia and Europe/CIS/ Africa regions. In particular, Russia, the Middle East, Sub-Saharan Africa, China and Australia are expected to be sources of strength in the coming quarters.

However, activity weakness in North America, where Schlumberger has a vast exposure, is likely to drag its share price, going forward. Management anticipates the first half of 2014 to be challenging in Mexico and Brazil as additional equipment mobilization to Mexico will likely take place in the latter half of 2014.

Moreover, the possible slowdown in Mexico later this year on reduced Chicontepec activity, flat activity in Southern Iraq in the first half of 2014 as well as weaker pricing from key contract rollovers and re-negotiations are expected to adversely impact the first half of 2014.

Stocks That Warrant a Look

While we expect Schlumberger to perform in line with its peers, one can consider stocks like Encana Corp. ECA, Pembina Pipeline Corp. PBA and Matrix Service Co. MTRX as attractive picks in the near term. All these stocks sport a Zacks Rank #1 (Strong Buy).