Schlumberger Shows Its Heels to the Services Group

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Given the world we inhabit today, it's tough to conjure up a group with more strategic importance and long-term staying power than the oil-field services contingent. Nevertheless, it would be simplistic to lump all the members of the group together, assuming equal strength for Schlumberger (NYSE: SLB  ) , the big enchilada of the sector, along with Halliburton (NYSE: HAL  ) , Baker Hughes (NYSE: BHI  ) , and Weatherford (NYSE: WFT  ) , the next three in order of size.

As last week rolled to a conclusion, my preference for Schlumberger as the strongest of the group was verified. The company, which sports a market capitalization three times that of Halliburton, benefited from relatively limited exposure to the transitioning North American market, nicely topping its results from the comparable quarter of 2011, while the next two in order of size saw their year-ovrt-year performances slide. Weatherford will step to center stage and tell us about its quarter in mid-November.

Another Schlumberger beat
For the quarter, Schlumberger increased its profit from continuing operations to $1.44 billion, or $1.08 per share, versus $1.3 billion, or $0.96 per share for the third quarter a year ago. Revenue increased 11% to $10.6 billion. It appears that the per-share consensus among analysts who follow the company was $1.07 per share, indicating that the beat goes on, so to speak, for the company.

By contrast, Baker Hughes' adjusted net income for the quarter came to $322 million, or $0.73, a 38% slide on the per-share line from 2011's third quarter. Revenue was up 1% year over year to $5.23 billion. Wall Street had expected earnings to come in closer to $0.84 a share. For the sake of perspective, Halliburton had led off earnings season for the big services companies on Thursday by reporting an 11% drop in earnings.

The importance of a global spread
Looking more closely at Schlumberger's results, it's clear that the company benefits from its relatively wide geographic diversity. In North America, its revenues were down 2% sequentially to $3.3 billion, while the international top line was up 3% to $7.2 billion. Among its three operating segments, the reservoir characterization group, which includes seismic leader WesterGeco, expanded its revenues by 5% sequentially, largely on the basis of heightened activity in the North Sea and Russia's chilly Arctic Kara Sea, along with strong land seismic activity in the Middle East.

The drilling group was able to expand its revenue slightly (1%) in large part through strong demand for its services in the Middle East and Asia. The production group was the only segment to suffer a sequential revenue reduction (2%), as it too felt the effects of a surfeit of hydraulic horsepower brought about by sequentially flat activity in the U.S. and Canada. With international activity strong, aside from a flat Latin America, and the aforementioned softness in North America, Eastern Hemisphere pricing improved steadily, essentially demonstrating the opposite of the trend in the Americas.

You'll perhaps recall that Schlumberger spends approximately $1.1 billion annually on all-important research and development, clearly a key reason for the company's technological supremacy in the industry. During the past quarter, its reservoir characterization group opened the Schlumberger China Petroleum Institute in Beijing.

On his company's call, Schlumberger's CEO Paul Kibsgaard characterized his company's position amid the ups and downs of the world's oil and gas scene by saying, "As we continue to navigate the overall macro uncertainty, manage the North American headwinds, and capitalize on the steady international growth, we maintain relentless focus on the quality and efficiency of execution." As a result, he predicted "double-digit growth in earnings per share in 2012..."

Baker's Western Hemisphere chill
From the perspective of pre-tax profit by geographic region, Baker Hughes suffered a whopping decline of more than 50% to $288 million in North America, followed by a 35% reduction to $45 million in Latin America. Both Europe/Africa/Russia Caspian and the Middle East/Asia Pacific regions were within striking distance of their year-ago results. These differentials indicate the relative significance of the Western Hemisphere for the Houston-based company.

Baker Hughes's CEO Martin Craighead said on his call, "...looking ahead...succeeding in this market requires differentiating technology and capital discipline. We continue to invest in the right technologies and commercialize new products and services." At the same time, he said, "...we are allocating capital to the product lines and regions that provide differential earnings growth, while ... we are reducing investment in product lines and geomarkets that are non-core or do not provide the required rate of return."

The Foolish takeaway
I'll now await the results on Thursday of this week from National Oilwell Varco (NYSE: NOV  ) , another strong member of the oil-field services group. In the meantime, however, it appears that Schlumberger has restated its overall superiority within the sector. I urge Fools to take into account the strategic importance of the group, and to add its biggest member and runaway leader to My Watchlist.

David Lee Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company and National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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David Smith

A longtime securities analyst and multiple-term member of The Wall Street Journal's All-Star Research team, Dave specializes in energy and natural resources.

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