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Morningstar | SLB Reports Improved 2Q Results; Announces CEO Succession

Schlumberger reported second-quarter revenue up 5% sequentially with adjusted operating margins improving to 8.9% from 8.2%, because the company benefited primarily from activity increases in international markets, where revenue increased 8% sequentially. Revenue was flat year over year, owing to an 11% decline in North American revenue offsetting an 8% increase in international revenue. Adjusted operating margins remain below year-ago levels of 10.4%, which we estimate is mostly attributable to weakened activity and pricing in North America. Our fair value estimate remains unchanged for now.

Concurrent with the release of second-quarter results, Schlumberger announced that CEO Paal Kibsgaard will be retiring in August and will be replaced with current COO and long-term company veteran Olivier Le Peuch. Kibsgaard had served as CEO since 2011. For now, we don't think the CEO change will significantly change the company's strategy, and therefore our long-term forecasts are unchanged.

The weakness in U.S. shale markets continues to drag on Schlumberger's North American results. On the one hand, North American drilling revenue has held up well (with flat year-over-year revenue despite an 8% decrease in the North America horizontal rig count) because of the company's differentiated product offerings. However, the North American production segment revenue is down about 17% owing to weak pressure pumping results, despite preliminary data indicating that U.S. fracking activity has recovered to flat levels vs. a year ago. U.S. pressure pumping markets remain at overcapacity with weakened pricing. We expect the overcapacity to be resolved eventually as pressure pumpers rationalize their fleet capacity.

Internationally, the top-line increase of 8% is in line with management guidance and our expectations for a robust capital expenditure recovery. However, we were slightly disappointed with results in the drilling segment (which is 75% international by revenue), where adjusted operating margins slipped to 12.4% from 12.9% in the prior quarter. The segment experienced very strong top-line gains in 2018, yet operating income incrementals were weak. We had been hoping that profitability would improve in 2019 as project startup costs abated and performance gains generated improvements on performance-linked contracts, but so far that hasn't materialized.