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Can US Rig Count and Upstream Capex Impact Schlumberger?

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US rig count

As of the week ended June 29, the US rig count was 1,047, up 5% compared to the week ending March 30. An increase in the US rig count could step up Schlumberger’s (SLB) revenues and earnings growth in the second quarter.

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Revenue by geography

In the first quarter, Schlumberger’s North American revenue share increased to 37% of its total revenues compared to 28% in Q1 2017. In comparison, Halliburton (HAL) generated 61% of its first-quarter revenues in North America.

In the past six quarters, SLB has been shifting its focus back to North America after its effort to diversify internationally in 2016. In the first quarter of 2018, it generated 63% of its total revenues from international operations.

Did upstream companies’ capex affect SLB’s margin?

From Q1 2017 to Q1 2018, the upstream companies that make up the Energy Select Sector SPDR ETF (XLE) together increased their capex by 8%. XLE tracks an index of US energy companies in the S&P 500 index.

By the end of the second quarter, the price of crude oil increased 14% compared to the beginning of the quarter. Higher crude oil prices could lead to higher exploration and production activities by upstream producers, which, in turn, could boost the revenues and earnings for companies such as Schlumberger in the second quarter.

EBITDA margin comparison

Higher upstream capex typically leads to higher drilling and rig count, which moves revenues and operating margin for the oilfield equipment and services companies. However, not all companies are equally affected by the change in upstream capex.

From Q1 2017 to Q1 2018, SLB’s EBITDA margin (or EBITDA as a percentage of revenues) decreased from 21.6% to 20.3%. In comparison, from Q1 2017 to Q1 2018, Tenaris’s (TS) EBITDA margin increased from 17.2% to 19%. Baker Hughes, a GE Company’s (BHGE) Q1 2018 EBITDA margin was 10.3% compared to 13.7% a year ago.

Next, we’ll look at Schlumberger’s growth drivers for Q1 2018.

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