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What’s Really Driving Schlumberger’s Value?

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Mar. 10 2016, Updated 8:07 a.m. ET

Schlumberger’s revenue growth

Schlumberger’s (SLB) revenues were in a downtrend from 1Q15 until 4Q15. Geographically, revenues from Schlumberger’s North America region declined the most, by 55%, in the past one year until 4Q15. Its Middle East and Asia region revenue fall was relatively moderate, by 27%, during the same period.

All of Schlumberger’s three product group segments witnessed revenue declines in 4Q15 over 4Q14. Its Production segment witnessed the highest revenue decline, by 45%, followed by Drilling, which saw a 35.5% fall, and Reservoir Characterization, which dropped by 34%.

In 2015, Schlumberger recorded total revenues of $35.47 billion, down 27% from $48.58 billion recorded in 2014. Schlumberger makes up 7.3% of the iShares US Energy ETF (IYE), but for investors looking for exposure to the industry, IYE has 15.2% exposure to oil and gas equipment and services.

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Explaining Schlumberger’s operating and net income

With regard to operating income, Schlumberger’s North America operation tumbled by 84% to $139 million in 4Q15 compared one year previously. The company’s Latin America region was more resilient, with 24% operating income fall during the same period.

In 2015, Schlumberger’s reported that its net income had deteriorated to ~$2.1 billion, compared to about $5.4 billion in 2014. In comparison, Halliburton (HAL), Schlumberger’s smaller market cap peer, recorded a $671 million net loss in 2015.

Why Schlumberger’s 4Q15 net loss deteriorated

In 4Q15, Schlumberger switched to about $1 billion net loss compared to the year-ago figure of $302 million in net income. Factors affecting SLB’s 4Q15 earnings included $530 million in pretax workforce restructuring charges and $1.6 billion pretax charges related to inventory write-downs, facility closures, contract terminations, and asset impairments.

Trends in Schlumberger’s value drivers

The following factors express the latest trends in Schlumberger’s business going forward:

  • lower onshore activity in North America
  • persistent pricing pressure for SLB’s products and services in North America
  • muted multi-client seismic license sales
  • lower drilling activity in Australia and Asia-Pacific
  • lower revenue from the Europe, CIS (Commonwealth of Independent States), and Africa area regions, due primarily to weakness in Russia

These negative factors were partially offset by SLB’s strong performance in Saudi Arabia, Kuwait, and Oman.

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