1Q15 operating income
In the second part of this series, we reviewed the 1Q15 earnings of Schlumberger Limited (SLB) versus its earnings estimates. In this article, we will look at Schlumberger’s first-quarter earnings in more detail and discuss the factors that affected net income.
SLB’s pre-tax operating income decreased 15.8% to $1.99 billion in 1Q15 from $2.36 billion in 1Q14. Most of the decline in operating income came from lower North American operations.
Operating margin—or operating income as a percentage of total revenues—decreased to 19.4% in 1Q15. Income margin before tax fell sharply in North American operations to 13% in 1Q15 from 18.5% for the year-ago period.
Reasons for quarterly performance slide
The deterioration in income and margin resulted from SLB’s poor showing in North American land activity. Depressed crude oil prices have led to 823 oil & gas rigs being idled in the US alone since the beginning of this year. That’s a 45% drop in the total US rig count. Oilfield service companies like Schlumberger, Halliburton (HAL), Cameron International (CAM), and Baker Hughes (BHI) typically suffer when rig count falls.
Also, many upstream companies have reduced their capex spending budgets for 2015. This has started to affect oilfield service players’ contract rates with those upstream companies and has reduced Schlumberger’s margin. SLB, BHI, and HAL together account for 18.8% of the VanEck Vectors Oil Services ETF (OIH).
In its international operations, Schlumberger recorded 2.6% lower income before tax for the following reasons:
- less spending by international upstream companies
- seasonal effects in the Northern Hemisphere
- devaluation of the Russian ruble, the Venezuelan bolivar, and other currencies
Where quarterly margin fall stymied
Segment-wise revenue fall
Among Schlumberger’s three key Product groups, the Reservoir Characterization group witnessed the highest revenue decline, 14%, in 1Q15 over 1Q14. The Production group managed to fare relatively well, seeing a 5.5% revenue drop during the same period. Three things caused the fall in revenues:
- sharp decrease in exploration-related services
- less development drilling activity
- decreased product, software, and multi-client sales due to lower customer spending