Despite Drop in Net Income, Schlumberger Meets 4Q Earnings Estimate

The company's chairman and CEO anticipates that weakened exploration and production spending will continue well into this year.
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A steep drop in the rig count in fourth quarter led to a 30% drop in net income for oil-service giant

Schlumberger

(SLB) - Get Report

.

But the industry bellwether met expectations, reporting today fourth-quarter net income of $278 million, or 50 cents per share, on revenue of $2.78 billion. That compares with net income of $399 million, or 71 cents per share, on revenue of $3.2 billion in the year-ago period.

Schlumberger's oilfield service revenue was lower in all major regions. Oilfield service revenues declined 10% overall, but hardest hit were North American revenues, which posted a 25% decline.

Euan Baird, Schlumberger's chairman and chief executive officer, said in a statement, "The weakening in E&P spending provoked by the flattening of demand in 1998 will continue well into this year. We expect that falling non-OPEC supply due to the decreased expenditure, coupled with a recovery in Asian oil demand, will produce higher oil prices and oilfield service activity in early 2000."

The following story originally appeared at 1:52 p.m. EST on Jan. 20:

Feeling the Squeeze at Schlumberger

Even giant Schlumberger will show the impact of the pitiful oil market when it reports fourth-quarter earnings Thursday morning.

Analysts will pay special attention to the company's profit margins and segment revenues in light of depressed oil prices, weak drilling activity and rampant cost-cutting.

Analysts surveyed by

First Call

forecast fourth-quarter earnings of 50 cents a share, down from 71 cents in the year-ago period. For the year, analysts expect the company to earn $2.49, 2 cents better than the $2.47 a share the company earned in 1997.

"Margins are going to be critical," says Jim Wicklund, who follows the company at

Dain Rauscher Wessels

in Dallas and rates it a buy. Dain has not performed underwriting for Schlumberger.

The concern is that in today's rough environment oil service companies have been slashing prices to get business.

Schlumberger has already felt the margin squeeze. At the third quarter's end, Schlumberger's net margins fell to 8%, according to First Call data, from the 12% a year earlier.

Schlumberger managed to keep revenue flat in the third quarter even with a 21% decrease in the number of rigs drilling worldwide. But few expect a fourth-quarter repeat, or a similar experience this year. At Dec. 31, the industry's rig utilization in the Gulf of Mexico had fallen to 73% from 96% in the year-ago period.

A Schlumberger spokesman declined to comment, citing a pre-earnings quiet period.

Last week, Wes Maat, an analyst at

Duetsche Bank Securities

, cut his 1998 earnings estimate to $2.46 from $2.56. Maat rates Schlumberger hold; Deutsche Bank hasn't performed underwriting for it.

Just as important as the earnings report is what management says about this year. A year ago, a warning from Euan Baird, Schlumberger's chairman and CEO, and a one-penny shortfall caused investors to flee the sector. Schlumberger shares dropped nearly 12%.

Maat says 1999 will see declines in drilling budgets and worldwide rig activities, which will lead to an unraveling of all or most pricing gains seen in the industry since 1995. He cut his 1999 earnings estimate last week to $1.50 from $2.10.

Industry revenues for services such as directional drilling, drilling fluids and seismic services will be off by at much as 25%, Maat says.

A bleak outlook for drilling-rig rental rates will also hurt Schlumberger's

Sedco Forex

division, one of the industry's larger drilling fleets. Included in its fleet are 30 land rigs and 19 jackup, or shallow-water, rigs. The industrywide land rig count, at 471 rigs under contract, is the lowest in recorded history, according to

Baker Hughes

(BHI)

, which keeps a weekly count of onshore and offshore rig activity. Schlumberger also has a large fleet of semisubmersible rigs, but many are designated for waters less than 1,000 feet deep, an area also affected by declines in oil company spending.