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Schlumberger Is Going Where No Oilfield Service Company Will Tread

NEW YORK (TheStreet) - Oilfield-services titan Schlumberger (SLB - Get Report) is targeting growth even as the biggest oil companies are cutting back on their spending.

In its recent quarterly results, Schlumberger's first-quarter revenue came up short of analysts' estimates, but the company delivered on earnings. The company's competitive advantage lies in its large global footprint which remains unparalleled in the industry.

This advantage fueled the company's overall margin expansion despite weakness in North America. The same advantage could drive Schlumberger's growth in the coming years as state-owned oil companies continue to spend billions of dollars even as oil majors cut back on capital spending.

Year-to-date, Schlumberger shares have gained 14%, currently trading at $101, easily outperforming the broader oilfield services industry as represented by the Market Vectors Oil Service ETF (OIH) and the iShares U.S. Oil Equipment & Services ETF (IEZ).

In the first quarter, Schlumberger's revenue climbed 6.3% from the same quarter last year to $11.23 billion while income from the continuing operations rose 32.6% to $1.60 billion, or $1.21 per share. Analysts, on the other hand, were expecting earnings of $1.20 per share from revenues of $11.49 billion.

In North America, Schlumberger reported a 12% revenue growth to $3.68 billion. The lower prices for pressure pumping services for onshore drilling and operational delays at the Gulf of Mexico had an adverse impact on the pretax operating margins which fell 53 basis points.

However, unlike its rivals, Schlumberger has little exposure to North America. The company gets a third of its revenues from this region as opposed to its two biggest competitors, Halliburton (HAL) and Baker Hughes (BHI), which generate nearly 50% of their revenues from North America.

Since Schlumberger gets nearly 70% of its revenues from international markets, where its pretax operating margins grew by 286 basis points, therefore the company still reported overall margin expansion of 248 basis points.

In Latin America, Schlumberger's revenue fell 7.7% from last year to $1.76 billion. This was due to the weakness in Brazil and a cut in expenditure by Pemex in Mexico. Similarly, Baker Hughes and Halliburton also posted a 10% and 9% drop in quarterly revenues from Latin America.

Schlumberger's revenues from the Middle East and Asia grew by 19% from last year to $2.84 billion while pretax margins expanded by 349 basis points to 26.3%. This strong growth was due to the strong demand from the United Arab Emirates and Saudi Arabia.

Middle East is also driving growth of Schlumberger's competitors. Halliburton and Baker Hughes also reported a 13.5% and 24% growth in revenues from Middle East and Asia regions. Despite the double-digit growth, the combined revenue of Halliburton and Baker Hughes are $450 million less than Schlumberger's revenues from this region.

Schlumberger's revenues from Europe, commonwealth of independent states (CIS) and Africa increased slightly by 1% from last year at $2.88 billion.

The oilfield services companies are increasing their focus on the state owned energy companies that are spending billions to develop their resources.

Take Saudi Aramco for instance. This is Saudi Arabia's state-owned energy behemoth and the largest producer and exporter of petroleum on the planet. Over the last 10 years, Saudi Aramco has increased its capital budget by 10 times to $40 billion. The company is developing its new deposits as well as unconventional reserves as it faces declining output from its older fields.

Moreover, according to a report by Barclays, the exploration and production expenditure in the Middle East could increase by 14% next year driven by an uptake in activity by the national oil companies in the region.

Investors should note that Mexico's state-owned Pemex cut its expenditure in the previous quarter, which caused an year-over-year decline in Schlumberger's revenues from the country. This however, is a short term hiccup. Schlumberger has, in fact, secured a $1.9 billion contract with Pemex. The oilfield services company will likely deliver higher revenues in the coming quarters.

On other hand, the listed oil majors, such as Chevron (CVX), Royal Dutch Shell (RDS.A) and Exxon Mobil (XOM), are cutting back their exploration budgets due to stagnant oil prices and rising production costs.

During the conference call, Schlumberger said that it already gets more than 70% of its total revenues from independent and state-owned oil companies.

The national oil companies own about 80% of the world's proven oil reserves.

Moreover, with a long history of operations, Schlumberger enjoys a healthy relationship with these state-owned oil companies. Schlumberger has a stronger foothold in these regions than Halliburton or Baker Hughes as the former generates more than twice as much revenues from international markets than either of its two competitors. Therefore, Schlumberger is in a good position to capitalize on this trend.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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