Schlumberger Updates: Issues Q4 Operational Update, Acquires Software Firm GeoKnowledge

Oil field services major Schlumberger (NYSE:SLB) issued its fourth quarter operational update last Friday. The firm warned that its earnings for the quarter could be impacted by contractual delays and seasonal slowdowns in its Europe/Africa/CIS operations as well as weak land-based drilling activity in the United States and Western Canada. ^[1]

While the firm did not elaborate on the details in the brief press release, it estimated that the net impact on earnings per share (EPS) will be between $0.05 and $0.07. Last quarter, the firm reported an EPS of around $1.08. It will release its Q4 2012 earnings on January 18 .

Implications for Schlumberger

While the US land drilling market has been depressed for some time due to weak gas exploration, we are concerned about the reduced activity in Western Canada. Drilling activity in Western Canada typically sees a jump during the winter as the frozen ground allows drillers to move heavy rig equipment without having to worry about the availability of road connectivity to drilling sites. ^[2] The Canadian rig count in January usually rises significantly, sometimes by as much as 40% over December. We believe that if the weakness in the Western Canadian market persists into January, it could impact the firm’s earnings next quarter as well. Given these broader industry trends, we believe the other oil field services majors could also possibly be impacted.

The firm’s strong international presence has so far helped it offset weak demand from the North American market. As of the end of November, the US rig count declined by over 10% since last year while the rig count in Canada declined by around 20%. Europe and Africa have witnessed rig count growth of about 4% and 19%, respectively, during the same period. ^[3] The firm did not disclose additional details about the contractual delays and seasonal slowdowns in Europe/Africa/CIS regions.

GeoKnowledge Acquisition

Last Thursday, the firm announced the acquisition of GeoKnowledge, a small Norwegian software company that specializes in developing applications for evaluating risks, resources and economic value in upstream activities. The firm did not disclose financial information relating to the deal. ^[4] The acquisition will complement one of Schlumberger’s existing oil and gas exploration software products, providing customers a comprehensive solution to model oil wells and reservoirs and assess exploration risk.

We have a $86 price estimate for Sclumberger, which is about 25% ahead of the current market price.

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1. Schlumberger Press Release [↩]
2. Precision Drilling [↩]
3. Baker Hughes International Rig Count [↩]
4. Schlumberger Acquires GeoKnowledge AS [↩]