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A Leader In Energy Despite Weak Quarter

Posted: Jan 27, 2009 14:03 PM by Eric Fox

Tickers in this Article: CPB, ORCL, RDEN, SLB

Schlumberger (NYSE:SLB) kicked off the oil services sector's earnings season with weak reported earnings, signaling more tough times ahead for the industry. Despite the earnings report, the company's strong balance sheet and industry dominance make it a good play for energy bulls.

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Schlumberger reported earnings per share of 95 cents on revenues of $6.87 billion. The report contained several charges and credits, and excluding these, earnings per share came in at $1.03. According to Thomson Financial Networks, the street was expecting $1.05 per share.

Reasons For The Weak Quarter
Schlumberger blamed the revenue decline on a strengthening U.S. dollar, lower activity in Russia and "generally weaker activity around the globe". The interesting part was that the weaker activity was seen everywhere except North America. This contradicts several industry surveys and the conventional wisdom that North America saw the steepest declines in drilling in the fourth quarter. (Learn more in The Impact Of Currency Conversions.)

A survey conducted by Barclays Capital in October 2008 showed that exploration and production spending in North America in 2009 is set to fall by 26% from 2008. Commodity prices were much higher when the survey was taken, and the actual decline is expected to be closer to 40%.

Andrew Gould, Schlumberger's CEO, cited a rebound in demand for oil as the key to stabilizing the sector. He also repeated the party line on the bull case for energy, saying "The age of the production base, accelerating decline rates and the smaller size of recently developed fields will mean that any prolonged reduction in investment will sow the seeds of a strong rebound."

Currency Impact
Schlumberger gets a high percentage of its business overseas, and the change in local currency value versus the dollar trimmed revenues by 3%. This currency effect is hitting more and more companies in the last few months in industries ranging from cosmetics to food to technology.

Elizabeth Arden (Nasdaq:RDEN) said in its most recent quarter that foreign currency changes would cause a 3% negative impact on revenues in fiscal 2009. The earnings impact was estimated at 23 cents per share.

Campbell Soup (NYSE:CPB) said that a stronger dollar would reduce the growth rate of revenues and earnings by 5% in fiscal 2009. The company gets 25% of its sales overseas.

Oracle (Nasdaq:ORCL) reported 8% software growth in the fiscal second quarter, but excluding currency impact, the growth would have come in at 14%.

Financials
Schlumberger finds itself in a secure financial position. The company had net debt of $1.12 billion at the end of 2008. Although $1.6 billion of its total debt is listed as current, the company can repay that out of its $3.6 billion cash balance if it can't roll it over. This is an enviable position to be in at the trough of an energy downturn, and management should be commended for achieving this. (Learn about components of the financial position statement and how they relate to each other. See Reading The Balance Sheet.)

Bottom Line
Although Schlumberger put out a weak quarter and negative commentary on the outlook for 2009, the company remains an excellent way to play a rebound in oil services due to its strong balance sheet and industry dominance.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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