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Schlumberger Limited (NYSE:SLB) provides oil & gas drilling & exploration companies technologically advanced equipment and management services that aid in the extraction and production of crude oil and natural gas. 89% of the company's 2008 revenue came from the oilfield services segment, through which Schlumberger provides oil production equipment and services covering the entire life cycle of a reservoir.^[1] Within this segment, Schlumberger's Integrated Product Management model provides drilling rig management and services to well constructions and operational rigs.^[2] WesternGeco, which accounted for 10% of the company's revenue, provides reservoir imaging, monitoring, and development services to land, marine, and shallow-water well projects.^[3]

Schlumberger provides its services to oil and gas companies operating across the world. Although Schlumberger is headquartered in Houston, 57% of the company's sales in 2008 came from Europe, Africa, the Middle East, and Asia. Its abroad operations, especially those located in Latin America, are the fastest growing segments in terms of sales, but Schlumberger's worldwide presence exposes the company's revenue and profitability to regional uncertainty, instability, and currency volatility. Nearly all of Schlumberger's revenue comes from providing services and equipment to oil and gas rigs, and the worldwide levels of oil and gas production heavily effect Schlumberger's revenues as a result.^[4] When oil prices peaked around $147/barrel during the first half of 2008, oil exploration and production companies were attempting to extract as much oil from the ground as possible.^[5] For Schlumberger, quarterly revenues increased by 15.10%, 19.60%, and 22.50% for the first, second, and third quarter of 2008 when compared to those quarters in 2007.^[6] When oil prices fell in the second half of 2008, and crude oil inventories increased, the amount of crude oil produced declined, which has meant less of a need for oilfield services.^[7] With fewer contracts and lower sales, Schlumberger has cut its capital expenditures budget for 2009 and has laid off 6% of its work force as of January 2009.^[8]

Company Overview

Breakdown of Revenue Segment 2004 to 2008^[9]

For 2009, weak demand and lower pricing negatively led to declines in both revenue and profitability. For the year, revenue form its oilfield services operations reached $5.74 billion, a 17% decline from 2008.^[10] Revenues from WesternGeco fell 8% when compared to revenues from 2008. In 2009, there were an average of 1,385 rigs operating in North America, 40% less than in 2008.^[11] Lower levels of rig activity contributed to the 44% drop in revenues from North America. For the company, gross margin fell by 3%, which contributed to the 31% drop in annual profits. In 2010, Schlumberger plans to raise its capital expenditures budget by 24% for oilfield services operations and cut it by 35% for WesternGeco.^[12]

Schlumberger's performance in the fourth quarter of 2009 showed improvement in several GeoMarkets and the deepwater drilling industry.^[13] Revenue for the final quarter of 2009 increased sequentially in North America, Latin America, the Middle East, and Asia. Due to rising rig counts, especially deepwater rigs, software and product sales rose in the fourth quarter.^[14] Overall, net income for the fourth quarter was $795 million, a 45% decline compared to the same quarter in 2008.^[15] Fourth-quarter pretax operating income of $1.01 billion was down 3% sequentially and 37% year-on-year.^[16] Profit margins fell 1.57% from the third quarter due to lower sales in Russia and Mexico as well as lower pricing on its products.^[17] Using Schlumberger's fourth quarter earnings as an indicator for 2010, CEO Andrew Gould argued that oil prices are likely to remain near the $70 to $80 region. On the other hand, he believes the natural gas markets "remain generally oversupplied," which has the potential of keeping prices relatively low.^[18]

Oilfield Services( 89.5% of 2008 Revenue)

Breakdown of 2008 revenue from oilfield services by geographical region^[19]

Through its oilfield services segment, Schlumberger provides technology, project management tools, and information solutions to companies engage in the exploration and production of oil and natural gas. Schlumberger divides the company's oilfield services operations geographically into segments called GeoMarkets.^[20] The principle GeoMarkets include North America, Latin America, Europe/CIS/Africa, and the Middle East & Asia. When the company was first formed, Schlumberger sold its wireline logging technology in order to provide detailed oil-and-gas well information to exploration and production companies.^[21]Through acquisitions and its own research and development department, Schlumberger offers a full range of services and equipment for the entire life cycle of the reservoir.^[22] The company's oilfield products include wireline logging, directional drilling technology, well testing, artificial lifts, and information solutions. Schlumberger's operates using a business model known as Integrated Project Management(IPM), which provides its customers with the necessary products and technology as well as the management to operate those products.^[23]

In this segment, 2008 full-year revenues increased 20% when compared to the previous year to $24.28 billion.^[24] All technologies grew by double-digits in 2008, in particular Schlumberger's well services, drilling and measurements operations grew substantially. Revenue from operations in Latin America increased 28% in 2008 due to higher sales of IPM products in its Central America and Peru/Colombia/Ecuador GeoMarkets as well as higher offshore well services sales in its Brazil operations.^[25] Higher demand for oilfield services in Russia led to a 24% increase in 2008 revenue in Schlumberger's Europe/CIS/Africa GeoMarket.^[26]

WesternGeco

Schlumberger's WesternGeco operations provide reservoir imaging, monitoring and well development services, and seismic crews and data processing centers.^[27] WesternGeco sells its 3D and time-lapse (4D) seismic analysis services for prospective and current reservoirs.^[28] Through its WesternGeco operations, Schlumberger provides seismic imaging and monitoring services to land-based, marine, and shallow-water reservoirs.^[29]

Full-year 2008 revenue of $2.84 billion was 4% lower than in 2007.^[30] When oil prices began to drop in the second half of 2008, many of Schlumberger's customers reduced their spending on seismic development and imaging services.^[31] As a result, multiclient revenue declined 18% in 2008. However, revenue from its data processing services increased 19%.^[32]

Trends and Forces

Providing advanced technology to oil majors has the potential of playing an important role in Schlumberger's involvement in deepwater drilling

In September 2009, companies including BP, Petroleo Brasileiro and Eni found nearly 10 billion barrels of oil equivalent of potential reserves offshore.^[33] Many western oil majors are spending billions of dollars on exploration operations in the Gulf of Mexico, offshore Brazil, and offshore West Africa in the hopes of making similar finds.^[34] Altough BP's and Petrobras' discoveries are expected to be massive, they are both located in subsalt regions, which have the potential of posing problems for two reasons.^[35] First, the crude oil must be pumped through a thick layer of salt that shifts under geological pressure.^[36] Also, oil drillers must ensure that paraffin in the oil does not solidify due the low sub-sea temperatures and clog pipelines. As a result, the ability of oil drillers to overcome these challenges depends on the equipment they use.^[37] For companies like Schlumberger, the deepwater oil finds have the potential of boosting sales of advanced, and expensive equipment.^[38] However, increased deepwater drilling also has the potential of creating a technological race between many of the big oilfield services companies. In September 2009, Schlumberger signed an agreement with the Federal University of Rio de Janeiro to build a subsalt research center. Schlumberger is acting quickly as well: the 86,111 square feet facility has the potential of being completed within a year.^[39]

Fluctuating crude oil and natural gas production had significant impact on Schlumberger's profitability in 2008 and 2009

Because Schlumberger's services help oil E&P companies extract oil and natural gas from the ground, the company's revenue is strongly effected by the production and consumption of oil and natural gas. In 2008, Schlumberger's quarterly revenue growth closely resembled the changing price of oil. Year-over-year quarterly revenues increased by 15.10%, 19.60%, and 22.50% for the first, second, and third quarter of 2008. During those quarters, oil prices were rising, peaking at $147 per barrel in July 2008.^[40] By the end of 2008, oil prices had fallen to under $40 per barrel.^[41] Due to lower consumption of oil products, the number of operational U.S. drilling rigs dropped 25% between September 2008 and January 2009.^[42]In the fourth quarter, Schlumberger’s profit fell 17% from a year earlier as costs rose 19% due to numerous high cost projects involving far offshore drilling.^[43] As result, cutting costs became the focus of Schlumberger's management in early 2009.

While profits also fell for first quarter 2009, Schlumberger was able to reduce its operating costs. For the first quarter of 2009, Schlumberger reported revenues of $6 billion versus revenues of $6.89 billion in the fourth quarter of 2008, and $6.29 in the first quarter of 2008.^[44] Operating income decreased 25% when compared to the fourth quarter of 2008 and 28% year on year.^[45] The overall decline in natural gas rigs in North America and Russia meant less need for oilfield services equipment and services and brought on the decline in quarterly revenues for the company's oilfield services segment, which were 13% lower when compared to the fourth quarter 2008.^[46] In anticipation of lower demand for its products and services for the rest of 2009, Schlumberger has cut operating costs significantly through layoffs and capital expenditure cuts. Operating costs fell by $405 million in the first quarter of 2009 versus the fourth quarter of 2008.^[47]

While sales to international oil producers increased, revenues from U.S. operations continued to decline in the second quarter of 2009. Sales in the U.S. reached a five-year low in the second quarter; revenue from North America was 31% lower sequentially and 43% lower year-on-year.^[48] In the U.S., the rig count declined approximately 27% and pricing continued to drop.^[49] Although not as severe, revenue declined in almost every GeoMarket in the second quarter of 2009. Operations in Russia were an exception. Sequentially, revenue from Russia increased from offshore activities in the East and generally improved activity levels in East and West Siberia. Overall, net income decreased 13% sequentially and 42% year-on-year.^[50] While costs continued to decline, Schlumberger CEO Andrew Gould said that oil prices must reach $70/barrel for oil production activity to increase worldwide.^[51]

Several of these trends continued through the third quarter of 2009. Earnings fell 48% in the third quarter due to weak demand and pricing.^[52] However, drilling declines slowed internationally and in the U.S..^[53] Although these are signs of stabilization, Schlumberger believes that prices are unlikely to improve by the end of 2009.^[54] Not only are crude prices expected to remain weak, but seasonal factors and price concession made in the first half have the potential of leading to further drops in earnings in 2009.^[55]

For the first nine months of 2009, many of Schlumberger's competitors have faced cash shortages, which have negatively impacted their ability to continue their current operations as well as their ability to expand. Baker Hughes, Weatherford, and Smith International all have cash problems that have the potential of curtailing expenditures and expansions into 2010.^[56] Schlumberger has avoided many of the problems facings these companies due to the rise in international sales as well as better operating margins.^[57] While international drilling has begun rising, drilling in North America has remained relatively stagnant, which has hurt companies that typically derive most of their sales from the region. As a result of its stronger balance sheet and cash-on-hand, Schlumberger has the potential of gaining market share. ^[58]

For 2009, low demand for services and discounted pricing contributed greatly to 17% decline in annual Revenue and the 3% drop in gross margin.^[59] CEO Andrew Gould argued that low gas and oil prices during the first half of 2009 led to less demand for energy services for 2009. As a result, the trend of rising energy prices in the second half of 2009 has the potential of improving the company's profitability in 2010.^[60] While Gould believes that the world supply of usable gas and oil was too high by the end of 2009, government stimulus spending and new drilling projects from companies like General Electric and Chevron have the potential of leading to a rebound in the demand for drilling services.^[61]

Schlumberger's Worldwide Operations Have Potential for Growth, but Expose Company to Regional Risks

By operating in over 80 countries worldwide, a majority of Schlumberger's revenue growth comes from operations outside of the United States.^[62] Schlumberger operates worldwide for a good reason; the company's two fastest growing GeoMarkets are the Latin America and Europe/CIS/Africa operations because operations in sales of well testing and well development equipment and services in Russia, Venezuela, and Brazil.^[63] Operations in these countries required Schlumberger's equipment and operational knowledge in order to test, analyze and developed oilfields discovered in 2007 and 2008.^[64] In 2008, Brazil began developing oil wells in its Tupi fields, an offshore oil basin discovered to have a potential 8 million barrels of oil.^[65] Developing new fields in Russia, Venezula, and Brazil requires technologically advanced equipment, and Schlumberger's sales in these regions have the potential of benefiting from increased investments in the development of new and current oilfields.

However, Schlumberger's vast operations expose the company's operations and profitability to regional political risk. Regional instability or economic uncertainty have the potential of affecting oilfield developments in a country, and reduces the need for equipment from service companies like Schlumberger.^[66]

Schlumberger's Venezuelan operations have the potential of being taken over by the Venezuelan government. By June 2009, Venezuelan President Hugo Chavez had nationalized most of Venezuela's oil operations, and, beginning in May 2009, Chavez began to seize several small oil service companies along with U.S.-owned gas compression units.^[67] Chavez has not taken over the Venezuelan operations of large service companies like Schlumberger, Baker Hughes (BHI), and Halliburton Company (HAL) as of June 2009.^[68] However, the company's Venezuelan assets have the potential of being seized by the government if Schlumberger refuses to accept the terms that are on offer or refuse a write-down on their debt.^[69]

Currency inflation also has the potential of reducing revenues from the sale oilfield services. In the fourth quarter of 2008, revenues from Latin American operations declined 2% compared to the prior quarter as a result of currency inflation in many Latin American countries.^[70] Overall, currency changes in the last quarter of 2008 resulted in a 3% decline in revenues when compared to the third quarter.^[71]

In March 2009, Schlumberger finalized a $687 million drilling contract with Petroleos Mexicanos, or Pemex.^[72] While Pemex's production declined 9% in 2008, the company plans on reversing that trend by increasing the money it spends on exploration and production projects.^[73] Schlumberger singed a three-year contract for Pemex's Chicontepec region, a field located in northern Mexico.^[74]

The demand for new equipment and technology is vital to Schlumberger's revenue growth

In 2008, 89.5% of Schlumberger's revenue came from the sale of its oilfield services. As a result, the ability to provide its customer's with technologically advanced and accurate equipment has the potential of effecting Schlumberger's revenues substantially.^[75] Revenues from Schlumberger's oilfield equipment experienced double-digit growth in 2008, especially equipment used in the development and analysis of complex wells.^[76] In response, research and development expenditures increased 12.5% in 2008 when compared to 2007. The need for technologically advanced equipment is capable of determining amount of capital Schlumberger devotes to developing new technology in 2008.^[77] Many Oil & Gas Majors have reduce their oil production for the first quarter of 2009, which has resulted in lower sales of Schlumberger's technology.^[78]

Competition

Baker Hughes (BHI): Baker Hughes is an oilfield services company that sells drilling equipment and provides technology services that help oil E&P companies to drill oil wells.^[79] The company operates in two segments: the Drilling and Evaluation segment, and the Completion and Production segment.^[80] The drilling and evaluation operations supply products and services like drill bits and wireline logging that are used to drill and evaluate oil and natural gas reservoirs.^[81] The company's Completion and Production segment supplies equipment and provides services that aid exploration and production companies from the completion of a well to the end of the reservoir's life. In April 2008, the Company acquired two reservoir consulting firms.^[82]

Halliburton Company (HAL): Halliburton supplies oill and natural gas companies equipment and services that help them extract crude oil and natural gas from the ground.^[83] The company's Completion and Production operations consist of production enhancement services, completion tools and services, and cementing services designed for completed and operational wells.^[84] Oil and natural gas companies can use the equipment and technology provided by Halliburton's Drilling and Evaluation Segment to analyze potential well sites and begin drilling.^[85]

BJ Services Company (BJS): BJ Services provides pressure pumping and other oilfield services to oil and natural gas exploration and production companies.^[86] Pressure pumping services include cementing and stimulation services employed in the completion of new onshore and offshore wells and in remedial work on existing wells and accounts for 81% of the Company's 2008 revenue.^[87] BJ Service's oilfield services operations provide equipment that help oil and natural gas companies develop and maintain wells.^[88]

Recent Events

Schlumberger registers strong y-o-y growth in its 3Q 08 top-line, however margins decline reflecting the impact of hurricanes - Gustac & Ike, slowdown in Alaska and unfavourable revenue mix in Latin America. ^[93]

Notes

1. ↑ slb.com: Investor Center, Revenue and Income from Operations, April 2009
2. ↑ Schlumberger Company Background
3. ↑ slb.com: Company Background
4. ↑ slb.com: Company Background
5. ↑ slb.com: Company Background
6. ↑ slb.com: Company Background
7. ↑ slb.com: Company Background
8. ↑ slb.com: Company Background
9. ↑ : SLB Annual Report 2008
10. ↑ Business Week: Schlumberger Profit Falls as Customers Cut Spending (Update5), January 2010
11. ↑ Business Week: Schlumberger Profit Falls as Customers Cut Spending (Update5), January 2010
12. ↑ Business Week: Schlumberger Profit Falls as Customers Cut Spending (Update5), January 2010
13. ↑ Schlumberger Announces Fourth-Quarter and Full-Year 2009 Results, Januaray 2010
14. ↑ Schlumberger Announces Fourth-Quarter and Full-Year 2009 Results, Januaray 2010
15. ↑ Schlumberger Announces Fourth-Quarter and Full-Year 2009 Results, Januaray 2010
16. ↑ Schlumberger Announces Fourth-Quarter and Full-Year 2009 Results, Januaray 2010
17. ↑ Schlumberger Announces Fourth-Quarter and Full-Year 2009 Results, Januaray 2010
18. ↑ Schlumberger Announces Fourth-Quarter and Full-Year 2009 Results, Januaray 2010
19. ↑ : SLB Annual Report 2008
20. ↑ SLB 2008 Annual Report Pages 19-22
21. ↑ SLB 2008 Annual Report Pages 19-22
22. ↑ SLB 2008 Annual Report Pages 19-22
23. ↑ SLB 2008 Annual Report Pages 19-22
24. ↑ SLB 2008 Annual Report Pages 19-22
25. ↑ SLB 2008 Annual Report Pages 19-22
26. ↑ SLB 2008 Annual Report Pages 19-22
27. ↑ SLB 2008 Annual Report Pages 23-24
28. ↑ SLB 2008 Annual Report Pages 23-24
29. ↑ SLB 2008 Annual Report Pages 23-24
30. ↑ SLB 2008 Annual Report Pages 23-24
31. ↑ SLB 2008 Annual Report Pages 23-24
32. ↑ SLB 2008 Annual Report Pages 23-24
33. ↑ WSJ: Oil Investors Embark on Voyage of Oil Discovery, September 2009
34. ↑ WSJ: Oil Investors Embark on Voyage of Oil Discovery, September 2009
35. ↑ Reuters.com: Schlumberger plans Brazil subsalt research center, September 2009
36. ↑ Reuters.com: Schlumberger plans Brazil subsalt research center, September 2009
37. ↑ Reuters.com: Schlumberger plans Brazil subsalt research center, September 2009
38. ↑ Reuters.com: Schlumberger plans Brazil subsalt research center, September 2009
39. ↑ Reuters.com: Schlumberger plans Brazil subsalt research center, September 2009
40. ↑ slb.com: Company Background
41. ↑ Schlumberger 2008 10-K Report, page 17
42. ↑ WSJ: Schlumberger's Net Falls 17% Amid Pullback in Oil Drilling, January 2009
43. ↑ WSJ: Schlumberger's Net Falls 17% Amid Pullback in Oil Drilling, January 2009
44. ↑ SLB 2009 1Q Earnings, April 2009
45. ↑ SLB 2009 1Q Earnings, April 2009
46. ↑ SLB 2009 1Q Earnings, April 2009
47. ↑ SLB 2009 1Q Earnings, April 2009
48. ↑ Schlumberger.com: Schlumberger Announces Second-Quarter 2009 Results, July 2009
49. ↑ Schlumberger.com: Schlumberger Announces Second-Quarter 2009 Results, July 2009
50. ↑ Schlumberger.com: Schlumberger Announces Second-Quarter 2009 Results, July 2009
51. ↑ WSJ.com: Schlumberger CEO: $70/Bbl Oil Price Needed To Boost Activity, July 2009
52. ↑ WSJ: Schlumberger Profit Drops 48% on Weak Demand, October 2009
53. ↑ WSJ: Schlumberger Profit Drops 48% on Weak Demand, October 2009
54. ↑ WSJ: Schlumberger Profit Drops 48% on Weak Demand, October 2009
55. ↑ WSJ: Schlumberger Profit Drops 48% on Weak Demand, October 2009
56. ↑ Associated Press: Schlumberger shares rise as analyst upgrades stock November 2009
57. ↑ Associated Press: Schlumberger shares rise as analyst upgrades stock November 2009
58. ↑ Associated Press: Schlumberger shares rise as analyst upgrades stock November 2009
59. ↑ [ http://online.wsj.com/article/SB10001424052748704509704575018694293494812.html WSJ: Schlumberger's Profit Falls as Demand Sags, January 2010]
60. ↑ [ http://online.wsj.com/article/SB10001424052748704509704575018694293494812.html WSJ: Schlumberger's Profit Falls as Demand Sags, January 2010]
61. ↑ [ http://online.wsj.com/article/SB10001424052748704509704575018694293494812.html WSJ: Schlumberger's Profit Falls as Demand Sags, January 2010]
62. ↑ SLB 2008 Annual Report, page 7
63. ↑ SLB 2008 Annual Report, page 17
64. ↑ SLB 2008 Annual Report, page 17
65. ↑ Oilshalegas.com: Brazil Tupi Oil Field Information - Santos Basin, August 2008
66. ↑ SLB 2008 Annual Report, page 7
67. ↑ Reuters: Chavez to expand Venezuela oil nationalizations, June 2009
68. ↑ Reuters: Chavez to expand Venezuela oil nationalizations, June 2009
69. ↑ Reuters: Chavez to expand Venezuela oil nationalizations, June 2009
70. ↑ SLB 2008 Annual Report, page 19
71. ↑ SLB 2008 Annual Report, page 19
72. ↑ WSJ: Schlumberger Wins $687M Drilling Contract In Mexico, March 2009
73. ↑ WSJ: Schlumberger Wins $687M Drilling Contract In Mexico, March 2009
74. ↑ WSJ: Schlumberger Wins $687M Drilling Contract In Mexico, March 2009
75. ↑ SLB 2008 Annual Report, page 17
76. ↑ SLB 2008 Annual Report, page 17
77. ↑ SLB 2008 Annual Report, page 17
78. ↑ SLB 2008 Annual Report, page 17
79. ↑ BHI company profile, May 2009
80. ↑ BHI company profile, May 2009
81. ↑ BHI company profile, May 2009
82. ↑ BHI company profile, May 2009
83. ↑ Reuters: HAL Company Profile, May 2009
84. ↑ Reuters: HAL Company Profile, May 2009
85. ↑ Reuters: HAL Company Profile, May 2009
86. ↑ Retuers: BJS Company Profile, May 2009
87. ↑ Retuers: BJS Company Profile, May 2009
88. ↑ Retuers: BJS Company Profile, May 2009
89. ↑ Morningstar: SLB Financial Statements
90. ↑ Morningstar: HAL Financial Statements
91. ↑ Morningstar: BHI Financial Statements
92. ↑ Morningstar: Financial Statements for RIG
93. ↑ iirgroup.com research report on Schlumberger Ltd.