Gusher May Be Ahead in Oil Service

Schlumberger's (SLB - commentary - Cramer's Take) earnings may well trump any concerns over the implications of unseasonably warm weather for oil field stocks.

Schlumberger reported fourth-quarter earnings of $1.05 a share Friday morning, soundly beating analyst expectations of 96 cents. While the strong results and Thursday's announcement of a 2-for-1 stock split and a dividend boost should get the stock moving again, it's Schlumberger's outlook for 2006 that gets my attention. Its bullish outlook suggests a very strong earnings season is ahead for oil field service stocks.

A Very Good Year

For the quarter, Schlumberger posted operating revenues of $4.02 billion, up 9% sequentially and 31% year over year. For 2005, Schlumberger posted operating revenue of $14.31 billion, an increase of nearly 25% from 2004. Not only is that impressive growth, Schlumberger believes it can repeat the trick this year.

"Overall, we expect our top line growth in 2006 to be similar to that experienced in 2005," Schlumberger CEO Andrew Gould said in the company's earnings press release.

Margins should expand as oil field activity accelerates, meaning more demand for Schlumberger's services and even more significant earnings growth. According to the company, earnings growth will come from a double-digit increase in land rig activity, stimulation services in mature producing basins and price hikes.

Part of the pricing increase will offset cost inflation for labor and raw materials. Still, the tight supply of oil field equipment and services, combined with accelerating demand, should lead to better margins in the coming months.

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Christopher S. Edmonds is a partner and managing director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.