Drilling Into Schlumberger's Fourth Quarter

Schlumberger (NYSE: SLB  ) , the world's largest oilfield services company by market capitalization, reported strong fourth-quarter earnings, fueled largely by strong international demand from the Middle East and Asia. Let's take a closer look at some of the quarterly highlights and what to expect from the company in the year ahead.

Drilling down into the numbers
The Houston-based oilfield services giant reported fourth-quarter revenue of $11.9 billion, up 7.5% year-over-year, while net income surged 28% year over year to $1.8 billion. Meanwhile, full-year 2013 revenue came in at $45.3 billion, up from $41.7 billion the year before, while full-year 2013 net income climbed to $6.3 billion, or $4.75 per share, up from $4.01 per share in 2012.

The strong improvement in both revenue and earnings was led by robust international activity, especially in Saudi Arabia, the United Arab Emirates, Malaysia, and Australia. Schlumberger's international revenue set a record in the fourth quarter, improving 18% year over year, while international margins ticked up more than 200 basis points, coming in at 22.2%.

Meanwhile, performance from its North American segment was buoyed by robust demand from deepwater projects in the U.S. Gulf of Mexico, which helped offset continued weakness in the onshore North American pressure pumping market. The company's North American revenues climbed by nearly $400 million to $13.9 billion in 2013, while margins came in at 19.7%.

What to expect in 2014
Looking ahead, pricing pressures caused by an oversupply of pressure pumping equipment in North America are expected to continue for some time, leaving limited room for margin improvements in that market. But Schlumberger's strong position in the Gulf of Mexico, a region primed for strong growth over the next few years, should continue to negate these pressures.

By 2020, deepwater capital expenditures are projected to more than double to more than $100 billion, with the Gulf of Mexico accounting for much of that increase. Indeed, most major oil companies have increased their deepwater capex spending outlook over the next few years, with ExxonMobil (NYSE: XOM  ) , Chevron, and BP (NYSE: BP  ) expecting deep-water projects to account for 8%, 40%, and 52%, respectively, of their production from new sources over the next decade.

With more than a dozen deepwater rigs expected to begin drilling in the Gulf this year, investors can expect Schlumberger to continue vying with peer Halliburton (NYSE: HAL  ) for market share in this lucrative market. Though Halliburton currently boasts a leading market share in Gulf completions, Schlumberger hopes to cement a lead with offerings such as the Colossuspremium rotational liner hanger system, which can help extend reservoir lives, and the Fortress premium isolation valve, which allows operators to switch seamlessly between completion stages.

Besides the Gulf of Mexico, Schlumberger's primary drivers of growth in the year ahead are likely to be Russia, the Middle East, sub-Saharan Africa, and China. With an expected shift in capital spending away from large infrastructure projects and toward drilling and completion spending in these regions, Schlumberger's reservoir characterization and drilling product lines -- which together account for about two-thirds of the company's revenue -- stand to benefit.

Schlumberger should also continue to enjoy peer-leading operating margins this year, made possible by its unparalleled global footprint and long-standing customer relationships. After securing a lead in North American margins in 2013, the company's overall margins are now more than 800 basis points above the average of its three main competitors -- Halliburton, Baker Hughes, and Weatherford (NYSE: WFT  ) .

The bottom line
With global E&P spending expected to grow by 6% this year, operators will continue to demand greater integration, quality and efficiency. Schlumberger, with its large and growing technological offerings and its excellent integration capabilities, is ideally positioned to benefit. In 2014, investors can expect the Gulf of Mexico, Russia, the Middle East, sub-Saharan Africa, and China to remain the company's biggest drivers of growth.

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