The world’s largest oilfield services provider Schlumberger Ltd. (SLB) reported adjusted first quarter 2014 earnings of $1.21 per share (excluding special items), beating the Zacks Consensus Estimate of $1.20.

Also, the quarter’s results increased from $1.01 per share earned in the year-earlier quarter. The results were boosted by the company’s growing new technology sales and expanding integration activity. This was partially offset by muted results from Russia, China and North America owing to severe winter weather.

Income from continuing operations, excluding charges, was $1.59 billion, up approximately 23% year over year.

Total revenue of $11.2 billion was up 6.3% from the year-earlier level of $10.6 billion. However, this was below the Zacks Consensus Estimate of $11.5 billion.

First Quarter Highlights

Oilfield Services: Segmental revenues were down approximately 6% year over year at $11.2 billion. Pre-tax operating income of more than $2.3 billion increased 21% year over year.

All groups – Reservoir Characterization, Drilling Group and Production Group – registered a sequential fall. This was due to the strong product, software and multi-client sales experienced in the fourth quarter of 2013. Seasonal activity slowdown in Russia and China; the completion of marine seismic surveys in Brazil, Norway, Malaysia and the Caspian Sea; and contract and operational delays in Brazil and Mexico were also responsible for the decline. However, these sequential effects were partly compensated by strong pressure pumping activity in the U.S. and Canada, which was partially muted by severe winter weather.

Reservoir Characterization: This group posted revenues of $2.9 billion in, up 2% year over year. Pre-tax operating income was $779 million, which increased 7% from the prior-year quarter.

Drilling Group: Revenues recorded by this group were $4.3 billion, which improved 7% from the year-ago quarter. Pre-tax operating income was $881 million, up 22% year over year.

Production Group: Revenues recorded by this group were $4.1 billion, which climbed 10% from the year-ago quarter. Pre-tax operating income was $737 million, up 33% year-over-year.

Financials

As of Mar 31, 2014, the company had approximately $7.1 billion in cash and short-term investments and $11.1 billion in long-term debt. In the reported quarter, Schlumberger repurchased 9.96 million shares of its common stock at an average price of $90.31 for a total purchase price of $899 million.

Our Take

Looking forward, Schlumberger’s overall outlook for 2014 remains largely unchanged from its earlier projections. The company remains unperturbed despite unusually harsh winter weather in parts of the Northern Hemisphere, slowdown of growth in China, and the unsettled situation in Ukraine. Supply continues to grow in North America, while other areas are struggling to meet their production targets.

The bullishness of the company stems from higher market share and an improving cost structure. The company in a smart move targeted state-owned and independent energy companies that are spending significantly to develop shale and other resources around the world, rather than multinational energy companies, most of which are cutting spending.

Schlumberger’s optimism on rising rig count activity will likely lead to increased international spending on exploration, higher production and stepped-up activity in the U.S. Gulf of Mexico. The company also expects steady growth in the key regions of Sub-Sahara Africa, Russia, the Middle East, China and Australia.

The oilfield services behemoth believes that strong leverage to the deepwater segment will help it to perform well over the coming years. While the company makes most of its money outside North America, it bears the brunt of industry-wide weakness in U.S. hydraulic fracturing services as well as softness in the land coiled-tubing business.

Schlumberger generates about two-thirds of its revenues internationally, marking the highest ratio among the biggest oilfield service providers, which include Halliburton Company (HAL) and Baker Hughes Inc. (BHI). Schlumberger’s strength also lies in effective implementation, strong contracts and new technologies.

Schlumberger currently holds a Zacks Rank #3 (Hold) and is expected to perform in line with the broader market over the next few months. However, there are other better- ranked sector stocks, like Zacks Ranked #1 Crescent Point Energy Corp. (CPG).

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