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Why Schlumberger’s Profits Soared

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Oil-field services provider Schlumberger (NYSE: SLB  ) reported solid third-quarter earnings last week, bolstered by strong international demand for its services. Let's take a closer look at the company's quarterly performance and what its future may hold.

Strong international performance
Schlumberger handily beat consensus analyst expectations for net income, which rose 20% from the year-ago quarter to $1.7 billion, while revenue increased to $11.6 billion, up 11% from $10.5 billion in the year-earlier period. Impressively, operating margins exceeded 20% across all four of the company's business areas, with its oil-field services pretax operating margin coming in at 21.5%, up 114 basis points from the second quarter.

While Schlumberger's North American business delivered another strong performance, despite weakness in the pressure pumping market, the real action was overseas. Indeed, the company's revenues from markets outside of North America jumped 12% year over year, as margins expanded by 134 basis points to 23%.

Robust growth in the Middle East and East Asia
Key drivers of this success included the Middle East, where revenues increased by an impressive 25% year over year and margins expanded by 330 basis points, and other regions in Asia, where onshore gas drilling activities in China and offshore drilling in Indonesia and Malaysia boosted profits.

In the Middle East, Schlumberger saw especially strong growth in Saudi Arabia and Iraq, as well as Qatar and the United Arab Emirates. The company is currently moving in additional equipment and personnel to Saudi Arabia, where client demand continues to grow. In China, where the company signed its first production management project during the quarter, Schlumberger will also be moving in personnel and equipment in the fourth quarter.

Baker Hughes (NYSE: BHI  ) , one of Schlumberger's chief rivals, also reported improved profits on the back of strong international performance, especially in the Middle East and Asia-Pacific. The company's net income rose 22% year on year, from $279 million to $341 million, while revenues jumped 7% to $5.8 billion in the quarter.

These results shouldn't come as a surprise. While capital spending by energy producers in North America has been sluggish this year, exploration and production spending in the Middle East is up 28% from 2012 levels, and spending in the Asia-Pacific has jumped 19% year over year, according to Barclays.

Still the best in oil-field services
In my opinion, Schlumberger remains the highest quality name among the oil-field services providers. It has the largest international presence among its peers, with international markets accounting for more than two-thirdsof its total sales -- an advantage that should serve it well, given the much rosier growth outlook for markets outside of North America.

It also has an advantage over competitors in terms of drilling technology, cemented by its 2010 acquisitions of Smith International and Geoservices, as well as leading positions in reservoir characterization and deepwater drilling services -- areas primed for strong growth over the next decade.

Still, it has plenty of competition from Halliburton (NYSE: HAL  ) , which has made the most rapid progress among its peers in expanding beyond its traditional stomping grounds in North America. Like Schlumberger, Halliburton is also aggressively targeting key regions in the Middle East and Asia, which means investors can expect some heated competition between the two -- and even Baker Hughes -- as they fight to gain dominant market share in these high-growth regions.

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