Most articles about the oil industry show a business heading up and up. Shale drilling in North America is going strong, and prices are reaching a point where producers aren't afraid to explore for oil again. Despite this optimistic outlook for oil and those that drill for it, shares of oil services giant Schlumberger (NYSE:SLB) are still not that far off the lows we saw at the nadir of oil prices back in 2016.

Is there something fundamentally different about the business that means investors should be avoiding this stock? Or is the world's largest oil services company simply being overlooked by Wall Street? Let's look at the company's most recent earnings results to see what is going on.

drilling equipment

Image source: Getty Images.

By the numbers

Metric Q2 2018 Q1 2018 Q2 2017
Revenue $8.3 billion $7.83 billion $7.46 billion
Pre-tax income $547 million $643 million $17 million
Diluted EPS (loss) $0.31 $0.38 ($0.05)
Free cash flow $252 million ($152 million) $98 million

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

Aside from a few blemishes, Schlumberger's results all showed significant improvement compared to the prior quarter and the previous year's results. Keep in mind, though, that this is a seasonal business, and the first quarter is typically one of the weakest quarters for the company, so that should be a relatively easy hurdle to clear. 

With the exception of Latin America, revenue for all of its geographic regions increased, driven mostly by a 43% year-over-year gain in North America. Historically, Schlumberger's business was much more geared toward markets outside the U.S. But it has done a remarkable job of investing heavily in the U.S. shale business and taking market share from some of the smaller players in the industry. Today, North America makes up 38% of total revenue.

The international markets continue to improve at an agonizingly slow but steady pace. Management noted that shale drilling in Argentina is one of the fastest growing markets, and it is starting to see an uptick in activity in markets that had been on the decline recently, notably Africa and the North Sea.

SLB pre-tax income by business segment for Q2 2017, Q1 2018, and Q2 2018. Shows increases for Reservoir Characterization and Production while Drilling and Cameron decline.

Data source: Schlumberger press release. Chart by author.

Perhaps the biggest surprise this past quarter were the lower pre-tax income results. Even though it was able to significantly increase operating income and expand margins for its Production business segment, operating margins decreased from a combination of tepid growth and increased spending on Schlumberger's part as it prepares for higher demand in its other segments. The company also took a one-time charge of $184 million related to what management said was the final round of workforce reductions related to a corporate restructuring. Earnings results over the past few years have been littered with these charges that are supposed to be one-time in nature. Considering the recent history of one-time charges, investors have every right to be a little skeptical that these charges won't keep happening. 

What management had to say 

After being one of the more pessimistic voices in the industry when oil prices were crashing, CEO Paal Kibsgaard has significantly changed his tone. In his press release statement, he foresees a time when oil services will be in high demand because of the need to spend on new oil and gas sources. 

Despite OPEC's recent decision to increase production, the global supply base continues to weaken from geopolitical pressure to remove Iranian production from the market, no apparent resolution to falling production in Venezuela, and Libyan exports continuing to be volatile. In North America, lack of additional pipeline capacity in the Permian Basin is becoming an increasing constraint to production growth. At the same time, spare production capacity, which is essentially limited to only a few OPEC countries, is now nearing its lowest level for more than a decade, while decline in the world's mature production base continues to accelerate. These developments underline the growing need for [exploration and production] spending to increase significantly, particularly in the international markets, as it is becoming more and more apparent that the new projects expected to come online during the next few years will not be sufficient to meet the increasing demand.

You can read a full length transcript of Schlumberger's most recent conference call here.

SLB Chart

SLB data by YCharts.

Are investments in oil services about to soar?

There continues to be mounting evidence that we are headed for a boom in oil and gas spending, which should bode incredibly well for Schlumberger and other oil services companies. We have already seen strong results in the U.S. as shale continues to grow at a blistering pace and drilling equipment and crews are utilized at incredibly high rates. And that part of the business is clearly one of the profit engines for Schlumberger as it waits for other parts of the business to pick back up.

Considering how little Schlumberger's stock has moved since the bottom of the cycle, it would appear that there is a lot of upside potential as drilling activity picks back up globally. As the world's largest oil services provider and a company that routinely rewards investors with a steady diet of dividends and a reduced share count, it could be a good time to pick up Schlumberger while we wait for the international oil and gas market to catch up to North America.

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.