Oilfield Services Firms’ Q1 Results Point to Another Strong Year Ahead

The Middle East and Asia will be key growth drivers for oilfield services companies.

Apr 21, 2014 at 3:38PM

Oilfield services firms Schlumberger (NYSE:SLB), Baker Hughes (NYSE:BHI), and Halliburton (NYSE:HAL) have released their financial results for the first quarter, posting better than expected profits. The results have highlighted strength in the Middle East and Asia. Both regions are expected to be key growth drivers for oilfield services firms going forward.

Excellent run in 2013
Oilfield services companies had an excellent run in 2013, with shares of Schlumberger, Halliburton, and Baker Hughes posting significant gains. As I noted in a previous article, the gains were mainly due to the fact that all three companies benefited from higher capital spending from oil majors. Although several big oil companies have announced plans to reduce capital spending over the next few years, the outlook for oilfield services companies has not dampened. This was confirmed by the recently reported first-quarter results.

Q1 results
Although the harsh weather in North America had a negative impact, all three major oilfield services firms posted better than expected earnings for the first quarter of 2014. Last week, Schlumberger reported first-quarter net income of $1.21 per share, beating Street estimates by a penny. Baker Hughes also beat Street estimates last week, posting first-quarter adjusted earnings of $0.84 per share. Analysts were expecting Baker Hughes to report adjusted earnings of $0.78 per share. On Monday, Halliburton reported earnings of $0.73 per share, beating forecasts of $0.71 per share.

More importantly, all three companies saw strong performance in the Middle East and Asia. Both regions are expected to be key growth drivers for oilfield services firms going forward.

Strong performance in the Middle East and Asia
Oilfield services firms have witnessed weakness in North America; however, their performance has continued to improve in the Middle East and Asia. In the first quarter of 2014, Halliburton saw its revenue and operating income from the Middle East/Asia region rise 13%. Dave Lesar, Chairman and CEO of Halliburton, said that Saudi Arabia led the improvement with growth across all product lines due to an increase in integrated project activity.

Schlumberger international revenue rose 5% in the first quarter of 2014. The increase was led mainly by 19% growth in revenue from the Middle East and Asia area. The company saw strong activity in Saudi Arabia and the United Arab Emirates.

Baker Hughes registered a 6% sequential increase in its international adjusted operating profit. The increase was driven mainly by resumption of the company's activity in Iraq, as well as by increased demand for high technology services in Africa, the Middle East, and Asia Pacific.

Another strong year ahead
Major oil companies have announced plans to slash their capital spending as they look to reduce debt and strengthen their balance sheets. That is not good news for the oilfield services industry. In addition, there is growing competition in North American shale fields. Still, the outlook for oilfield services companies remains bullish, thanks to growth in the Middle East and Asia. As I noted in a previous article on the industry, both regions will be the main growth driver for these companies.

Barclays Capital had noted in a report late last year that global exploration and production spending is expected to increase by around 6.1% to a record $723 billion in 2014, with a major part of spending growth expected to come from national oil companies in the Middle East. The first-quarter results of Halliburton, Schlumberger, and Baker Hughes have confirmed this as all three companies reported strong results from the region.

Given the solid outlook, there is certainly further upside potential in shares of oilfield services companies. 

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Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool recommends Halliburton. 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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