The Wall Street Journal-20080119-Earnings Digest -- Energy- Schlumberger Profit May Signal Slower Growth
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Earnings Digest -- Energy: Schlumberger Profit May Signal Slower Growth
Schlumberger Ltd.'s tepid fourth-quarter earnings augur the start of more sobering times for the oil-field services sector.
Shares of Schlumberger fell as it predicted slower international growth and reported a disappointing 22% rise in fourth-quarter profit after it was forced to cut prices in the U.S. and Canada.
While international growth drove Schlumberger's revenue in the latest quarter, the outlook from the company, seen as a bellwether for the oil-service sector, rattled investors. Chief Executive Andrew Gould said, "I think expectations on international growth were too high." He also signaled the company expects flat prices and activity in North America this year.
Schlumberger's stock fell $2.99, or 3.6%, to $79.52 in 4 p.m. New York Stock Exchange composite trading. It is now off more than 20% since the start of the year. Shares of its competitors, including Halliburton Co. and Baker Hughes Inc., tell a similar story, potentially marking the end of four years of almost uninterrupted growth.
The performance of the energy service sector, which conducts much of the technical work involved in finding and exploiting oil and gas fields, is mirroring the trend Big Oil has already confronted. While few anticipate an outright decline in 2008 earnings, thanks to the continued growth of offshore drilling and increased spending by national oil companies, explosive growth is set to slow for a couple of years.
Schlumberger, based in Houston and Paris, said revenue climbed 17% to $6.25 billion, but in North America revenue dropped 7% from a year earlier. Activity in the key market flattened out in the middle of last year, leading to an intense scramble for work among the sector's giants. Mr. Gould said the worst is likely over but added that activity and pricing are likely to remain flat in 2008. "I don't think you'll see another precipitous decline," he told analysts in a conference call Friday.
But the long-term outlook for natural-gas prices indicates that oil- services companies leveraged to North America may be more vulnerable than ever. Given the flood of new gas supplies expected in 2009, those firms have reason to worry that their margins have yet to bottom out. The hope for Schlumberger and its competitors is that by 2009 the rate of international revenue will pick up and, more importantly, that overseas margins will jump as well.
Internationally, Schlumberger saw increases in every region in the latest quarter. In the Middle East and Africa segment, revenue increased 30% while operating income jumped 40% on high demand.
Complicating matters for Schlumberger and its competitors, however, is Mr. Gould's forecast for slower growth overseas in 2008 than in 2007. International work has helped service companies continue to post strong results even as North American work stagnated. But the shortage of available drilling rigs places a cap on the jobs available to Schlumberger, Mr. Gould said.
The company awaits 160 new rigs expected to be delivered through 2011, he said, which will help service companies increase the share of their work conducted offshore and outside North America.
The company's oil-field-services segment saw revenue jump 18% to $5.44 billion. The results reflected growth driven by international demand for drilling and measurements services, offset by pricing pressures in the U.S. and various weather impacts and operational delays.
After years of increased spending among oil and gas producers to halt declines in natural-gas production and take advantage of rising oil and gas prices, growth slowed last year, prompting oil and gas producers to find ways to cut costs. Rival BJ Services Co. said in October it had cut its work force 19% over the past year, while Halliburton is watching its labor costs closely.
Tuesday, a Schlumberger spokesman said the company is cutting an unspecified number of North American employees, citing slowing demand for oil-field services.
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Donna Kardos contributed to this article.
