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Schlumberger's Earnings Break Out of Their Funk in the Third Quarter

By Tyler Crowe – Oct 20, 2017 at 2:08PM

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After several quarters of up and down results, Schlumberger is finally starting to feel the effects of a full-blown recovery in the oil market.

Anyone who thought the oil and gas industry's recovery was going to be linear was kidding themselves. For the past several quarters, we have seen the industry grow in fits and starts, especially oil services companies that have had to react to the booming North American market. 

This past quarter, though, oil services giant Schlumberger (SLB -2.00%) posted third-quarter results that suggest we are finally on the upswing. Here's a brief look at the company's most recent results and some of the more captivating moves management made recently to give Schlumberger some new growth opportunities. 

Oil inudstry workers joining drill pipe

Image source: Getty Images.

By the numbers 

Metric Q3 2017 Q2 2017 Q3 2016
Revenue $7.91 billion $7.46 billion $7.02 billion
Pre-tax income $667 million $17 million $200 million
EPS $0.39 ($0.05) $0.13
Free cash flow $1.1 billion $97 million $699 million

Data source: Schlumber earnings release. EPS = earnings per share.

Those in the oil service industry have been patiently waiting for their international clients to increase their investment levels. This is especially true for Schlumberger since it has a higher concentration outside of North America than its peers. That didn't come about this past quarter, as some might have expected, but fortunately, the company was able to make up for it with another quarter of double-digit growth in North America.

In the third quarter, Schlumberger's North America revenue grew 18% compared to the prior quarter for the second straight quarter and 53% year over year. The substantial gains came almost entirely from its exposure to shale as land drilling revenue grew 23% and hydraulic fracturing revenue specifically gained 42%. According to CEO Paal Kibsgaard, the company has redeployed almost all of its available idle equipment capacity in North America. Redeploying a lot of those assets meant higher costs, which suggests that we could see significant margin expansion in the coming quarter.

Outside North America was a bit of a mixed bag, though. There were some gains in Northern Europe, Russia, and Central Aisa because a lot of maintenance and turnaround work happens in the summer months. Declines in Iraq and Mexico mostly offset those gains as the company wrapped up major service contracts in those two countries. 

Across Schlumberger's various business segments, the most substantial change still came from its U.S. shale operations. Production was by far the largest gain for the quarter, but it was even surprised to see that its Cameron segment saw an uptick. Cameron's business is typically associated with offshore activity since it builds a lot of subsea equipment. This past quarter, though, management did say that some of those gains came from sales of the land equipment that it manufactures as well. 

SLB Pre-tax income by business segment for Q3 2016, Q2 2017, and Q3 2017. Shows gains for Production & Cameron while others remained flat.

Data source: Schlumberger earnings releases. Chart by author.

Turning to the balance sheet, the thing that sticks out is the sizable uptick in free cash flow. Much of that gain came from a slowdown in building working capital as well as a $685 million tax refund in the U.S. -- Schlumberger did take some sizable losses last year, after all. The company used some of that cash and cash on hand to reduce its total debt load by $1.6 billion. At the end of the quarter, Schlumberger had $12.2 billion in net debt. 

Let's make a deal...again

Schlumberger's management has made some audacious moves recently to expand the scope of its business. The acquisition of Cameron was the most notable, but the company has signed several joint venture deals since then. The most notable deals are the OneLNG venture with Golar LNGthe OneStim venture with Weatherford International, and the acquisition of Eurasia Drilling Company. That is just the tip of the iceberg, though. In 2017 alone, the company has signed five joint venture deals where the company would shore equipment or expertise with another oil services company.

Then, there are also the deals it's signing that get it into the production game. So far this year, it has signed a joint venture deal with Argentinian oil company YPF to develop assets, a memorandum of understanding with Saudi Aramco to boost production in the Kingdom, and an offshore agreement with the Nigerian National Petroleum company to front the capital to develop a reservoir. This past quarter, management took it one step further as it outright purchased 800,000 acres of oil & gas development rights with operating wells and infrastructure assets from Cenovus Energy for $1 billion. Schlumberger and its partner, private company Torexen Energy, will drill 1,600 wells in the formation starting in 2018. 

What management had to say

CEO Paal Kibsgaard has probably been one of the more negative voices on the oil and gas industry's outlook for some time. The past couple of quarters, though, his tone has changed, and it appears that he is much more optimistic about the oil & gas industry's future.

[T]he reduction in global oil inventories in the third quarter is showing that the oil market is now in balance, which is reflected in the upward movement in oil prices over the past month. ...

And while there is certainly some level of uncertainty around the exact timing of this industry recovery, we see a number of market factors and data points now emerging that make us increasingly positive and optimistic about the outlook for our global business. 

What a Fool believes

Schlumberger's results took another step in the right direction this past quarter. It was encouraging to see its North American business segment grow faster than the rig count, which means it's taking market share from someone. Hopefully, that will continue once the OneStim deal is closed later this year. 

The rest of the oil market is still in a holding pattern, but it's hard to envision a situation where it gets much worse from here. With that in mind, it appears that the company is in full recovery mode, and we can expect to see steady gains in profitability from here. 

Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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