Schlumberger’s earnings up, despite weaker fracturing demand

Schlumberger’s second-quarter earnings rose 4.8 percent from a year ago, boosted by international growth despite falling demand for its hydraulic fracturing services, the company said today.

The world’s largest oil field services company, which has 115,000 employees, reported a net income of $1.4 billion in the second quarter, up from $1.3 billion during the same period a year ago, the company said.

Its revenue for the quarter was $10.45 billion, up from $9.9 billion in the first quarter. The company made about $9 billion in the second quarter of 2011.

Schlumberger CEO Paal Kibsgaard said the company expected its margins for hydraulic fracturing services to continue shrinking in the third quarter as costs remain high and demand for dry natural gas drilling has dropped substantially.

Lower margins for Schlumberger’s fracturing services has been offset so far by strong results from the company’s Gulf of Mexico operations, he said. Kibsgaard highlighted the company’s positions in Russia and throughout Africa as areas where it continues to expect the most growth this year.

“Based on the current outlook Russia remains on track to be one of our fastest growing markets this year,” he said.

He also said Schlumberger is well-positioned in Iraq, where the company “secured most of the new key contracts awarded.”

Still, Schlumberger has faced pressures from higher costs and lower demand for hydraulic fracturing, or fracking. Fracturing margins are down 20 percent from their peak, he said.

“The margins in hydraulic fracturing is coming down and to what extent we can offset that will obviously be a function of continued activity in the Gulf of Mexico and we are heading into the hurricane season, which also brings some uncertainty,” he said. “So we’re obviously well-positioned to offset the hydraulic fracturing but to what extent we can do it is still a bit uncertain.”

Schlumberger’s performance, with an earnings-per-share of $1.05, up from 96 cents in the first quarter, was above analysts expectations of about $1.00, according to Simmons & Company International.

Fracking margins could also improve later in the year, boosting results for Schlumberger and other service companies as prices for a key ingredient – guar gum – are expected to decline. A shortage of guar gum, which is made from a plant grown mainly in India and used to thicken fracking fluids, has raised costs. Halliburton has blamed rising guar gum costs for an expected drop in quarterly margins.

But guar, which has been selling for as much as $12 a pound because of a shortage, could fall to around $5 a pound as increased supplies work into the market, said Stephen Ellis, an analyst for Morningstar.

“Once that happens, that’s going to be a very positive benefit,” Ellis said.

While margins in North America have weakened, continental work may have a brighter outlook for service companies than the international landscape, Ellis said.

“My read is that what’s happening on the international level is actually going to disappoint because you have those macro headwinds from Europe and China,” he said of the potential for poor economics to put a damper on demand for services.

Some of Schlumberger’s gains have come from its ability to not only win contracts from competitors, but do it at a premium, Kibsgaard said.

“We replaced our competitors 39 times,” Kibsgaard said. “We were replaced six times. … I would say the driver behind that is being able to perform within the contracts that you actually win.”

He added that Schlumberger has succeeded in winning those contracts despite its higher bids compared with competitors.

“We are not going in to replace our competitors at their pricing … we need a premium to do that,” he said.

Kibsgaard also highlighted several upcoming technology advancements that he said would improve the company’s performance.