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Diving Deeper into Schlumberger’s 2Q15 Earnings

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Operating income in 2Q15

In part one of this series, we discussed Schlumberger’s operating income decline in 2Q15 versus a year earlier. In this part, we’ll discuss Schlumberger’s (SLB) 2Q15 earnings in greater detail. SLB’s operating margin decreased to 20.0% in 2Q15 from 21.7% in 2Q14. Operating margin is defined as operating income as a percentage of total revenues.

Most of the decline in operating income came from lower North American operations. Pre-tax income margin fell in North American operations to 10% in 2Q15 from 13% a year ago. In contrast, international operations maintained steady operating income margins of ~24% during the same period.

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Why did quarterly performance slide?

The deterioration in Schlumberger’s 2Q15 earnings resulted from decreased North American land activity. Depressed crude oil prices have led to 126 oil and gas rigs being idled in the US alone from April to June. That’s a 13% decline in total US rig counts. Oilfield service (or OFS) companies like SLB, Superior Energy Services (SPN), Cameron International (CAM), and Dresser-Rand Group (DRC) typically suffer when the rig count falls.

In addition, poor weather conditions, including floods in Texas, Arkansas, and Alaska led to lower E&P activity. This created an OFS equipment oversupply situation, where pressure pumping pricing declined sharply, leading to worse margins for Schlumberger’s products. SLB accounts for 7.5% of the Energy Select Sector SPDR ETF (XLE).

In its North America operations, SLB recorded 39% lower operating income in 2Q15 over 2Q14 due to the following factors:

  • lower spending by US upstream companies
  • lower pressure pumping activity due to cold stacking of pumping equipment
  • weaker contract rates for land-based rigs
  • a shift towards lower margin development and completion products in offshore rigs

What helped slow the margin fall?

The following factors helped offset Schlumberger’s decline in margins:

  • significant margin expansions in Latin America and the Europe/CIS/Africa regions
  • a number of international contract awards

Next, we will discuss Schlumberger’s segment revenue and margins in 2Q15.

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