(Schlumberger, oil service earnings story updated for trading action)
NEW YORK (
) -- Fourth-quarter results from
set a positive tone for the oil service stock sector, but the earnings trade for the sector remains uncertain.
Schlumberger shares opened up on Friday, and shares of
were also all up by at least 1%, but the gains quickly narrowed and by mid-morning, Schlumberger was in the red..
The oil-service stocks had recently attained, and then given back, 52-week high levels, so the early Friday trade could have merely been an attempted relief rally back to the previous 52-week high levels, or event-driven traders waiting for the opportune moment to book profits, letting the stocks run up on the headline for a few moments before exiting at the optimal profit point.
Many analysts maintain that there is another leg up in the oil-service stocks levered to a cyclical story. Additionally, one of the biggest fears headed into the oil-service stock earnings was that investors would repeat last quarter's trade of selling off the stocks, even after strong earnings. Schlumberger was down by 1% by mid-morning on Friday, and the big early gain was erased, but it wasn't a big selloff either.
If there is going to be another leg up in oil-service shares, Schlumberger share trading on Friday morning wasn't looking like it would provide an answer to the question. If anything, the lack of any big sell on the news in the oil service shares on Friday morning was, in light of last quarter's earnings reaction, a modest positive, but the the fizzle after the big open for the stocks suggested that a broadly optimistic tone from management in upcoming earnings -- Halliburton reports on Monday -- may not be enough to push the stocks higher.
Schlumberger posted revenue in the fourth quarter above $9 billion, and ahead of the Street consensus of $8.8 billion. Earnings per share of 85 cents was ahead of the Street consensus of 77 cents.
Arguably more important than the backward looking numbers was the outlook from Schlumberger, and the commentary on activity outside North America. It wasn't very specific, but it was roundly positive.
Schlumberger noted that outside North America, activity improvements in the North Sea, West Africa, and several Middle East & Asia GeoMarkets, coupled with strong year-end product sales particularly for software, "more than offset" continued weakness in Mexico and seasonal activity decline in Russia.
Schlumberger noted that the consensus forecast for demand in 2011 shows a further healthy increase. "Oil prices have moved into a range that will encourage increased investment, particularly in exploration.... While we do not anticipate a return to pre-Macondo activity levels in deepwater U.S. Gulf of Mexico in 2011, we do expect a marked increase in deepwater activity in the rest of the world. These factors, coupled with increases in development activity and production enhancement in many other areas, promise stronger growth rates as the year unfolds," Schlumberger wrote.
As for natural gas, the oil-service company said that even with high supply, activity in the United States is likely to remain strong -- at least through the first half of the year -- due to the commitments necessary to retain leases, the backlog of wells to be completed, and the contribution of natural gas liquids to overall project economics. The company did say, as many have long anticipated, that increased service capacity will negatively affect pricing at some stage during the year.
A recovery in international activity to offset the peaking U.S. drilling market is the game-changer for these stocks, and Schlumberger was positive on this trend also, saying that, "Increased activity, coupled with the higher technology needs of exploration, deepwater operations, and tight gas activity, particularly outside North America, will make 2011 a stronger year for Schlumberger."
Some analysts are upgrading oil service stocks, expecting the charts to move onwards and upwards without waiting, such as BMO Capital Markets, which upgraded Baker-Hughes to a buy on Thursday and raised price targets across the group.
Other analysts, though, think that even if the stocks now return to 52-week high levels, it could take some more details about the outlook for 2011 and beyond before significant upside is modeled into shares, and that detail may not come until a little later in the year, an argument that is suggested by Schlumberger's comment about the "promise" of "stronger growth rates as the year unfolds."
Schlumberger will hold its bi-annual investor day in February.
-- Written by Eric Rosenbaum from New York.
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