EUR 850.00 For Business Accounts Only

Morningstar | Our Schlumberger FVE Is Unchanged After 2Q Results Despite Near-Term Challenges in Pressure Pumping

Narrow-moat Schlumberger posted solid second-quarter results. Revenue grew a modest 2% sequentially, but bottom-line results were more impressive, as operating margins improved to 10.8% from 10.3% previously. As expected, the reservoir characterization and drilling segments accounted for most of the sequential improvement in results. Our $65 fair value is unchanged for now.

The improvement in reservoir characterization (operating margins strengthening to 22.3% from 21.4%) was driven chiefly by a mix shift to higher-margin wireline work in Russia. However, because of seasonality, some of this benefit will probably unwind in the fourth quarter.

On the other hand, the robust growth in drilling signals a trend that is likely to continue in coming quarters. Revenue increased 8.7% (the fastest growth since the post-2014 downturn), and operating margins improved to 14% from 12.9% on the back of the ramp-up of several large international drilling projects.

We think international drilling margins should continue to improve through 2019 (we expect a drilling segment year average of 16%), not only due to continued fixed-cost absorption and abatement of startup costs, but also as the company increases prices. In particular, we think pricing will improve on Schlumberger’s integrated drilling services contracts as the company's performance improves.

Beyond drilling, we expect strong results overall in international markets for Schlumberger in 2019, including revenue growth of 9% (just below management’s guidance of 10%).

The weak spot this quarter came from Schlumberger’s U.S. land pressure pumping business, which is unsurprising given the imbalance in the market caused by ongoing fleet capacity additions combined with stagnant U.S. land completions (in anticipation of Permian Basin oil takeaway constraints). In the production segment, weak pressure pumping results were offset by ramp-up of the company’s in-basin sand mines as well as (encouragingly) 10% growth in North American artificial lift revenue.

We don’t expect weak pressure pumping results to weigh on Schlumberger’s results after Permian Basin takeaway issues are alleviated (likely by mid-2019), although we also don’t expect the business to become a growth driver for the production segment. Instead, subsequent improvements in segment results will be driven by the Schlumberger production management business, which we still believe is on track to create substantial value in coming years. Encouragingly, management reported positive developments in several key production management projects in the quarter, with strong drilling and completion efficiency gains in the Palliser Block in Canada as well as field-leading performance from the first two wells in its Vaca Muerta project in Argentina.