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Morningstar | Schlumberger Reports Unsurprising First-Quarter Results; Looking to Push Pricing Improvement in 2019

Schlumberger's first-quarter results were unsurprising. Revenue fell 4% sequentially due to seasonality but were up 1% year over year, as 3% year-over-year international market growth was offset by a 3% decline in North America (with the latter caused by the U.S. shale activity slowdown). Overall adjusted operating margin fell to 8.2% from 9% in the previous quarter owing to a weaker mix in the Reservoir segment along with a temporary bump in stock compensation pushing up corporate-level expenses. Our fair value estimate of $62 and narrow moat rating remain in place.

Most segments (except Reservoir) posted flat or better sequential margins despite the drop in revenue. Management highlighted this juxtaposition as a demonstration of efficiency gains and new product adoption, although we note that this has occurred in past first quarters (such as 2014). Still, we were encouraged by the improvement in Production segment operating margins to 7.5% from 6.7%, despite pricing headwinds in the U.S. pressure pumping market. We do think this is evidence of efficiency gains and perhaps customer adoption of new technologies, as management highlighted several concrete examples in the earnings release.

In international markets, Schlumberger intends to generate strong margin improvement in 2019 and 2020 owing to efficiency gains on its performance-linked contracts as well as pricing improvement. Now that the company is fulled mobilized on all of its integrated drilling services contracts, the efficiency gains should begin to play out in coming quarters. In pursuit of pricing improvement, Schlumberger is cutting capital expenditure (ex-SPM) by 25% versus 2018 levels in a deliberate attempt to create undercapacity in currently low-priced markets. We commend this effort, but we will be watching closely to see if competitors step in to capture market share. However, we expect 5%-10% international capital expenditure growth in 2019, which should be favorable to management's plan.