Schlumberger Limited (ADR) (SLB)

F4Phanatic (95.59) Submitted: 9/12/06 10:14 PM : Start Price: $63.14 SLB Score: 26.58

In 2005, Schlumberger demonstrated it's current strength of the oilfield services market. Exploration and production investment reached new record levels as SLB's worldwide customers began responding to the needs of adding new oil production to meet increased worldwide demand, while replacing production lost to natural reservoir declines. Natural gas activity remained strong in the United States and Canada while a large number of developments for future liquified natural gas supplies drove activity in overseas markets for Schlumberger. Major deepwater developments, and increased spending by oil companies, also drove overseas activity. Because of this, Schlumberger set new records in revenue and net income for Oilfield Services and Western Geco.

SLB's operating revenue of $14.31 billion grew by 25% with income from operations reaching $2.20 billion. This is an increase of 117% for Schlumberger. All of Schlumberger's operating areas contributed to these results, the growth from quater to quarter was driven by rising demand, increasing pricing and the accelerated introduction of new technology. The largest growth in activity was seen in the GeoMarkets of Canada; U.S. Land; Peru, Colombia and Ecuador; Southern Latin America; Russia; Nigeria; Australasia; Brunei, Malaysia and the Philippines; Saudi Arabia and the Arabian Gulf.

Shlumberger's performance was enhanced by the introduction of new technologies in 2005, such as Scope, a new generation of logging while drilling service - which improved efficiency in drilling operations and new levels of precision to well placement. Customers have been enthusiastic about Scope, which has increased drilling performance, especially when it's used with SLB's successful PowerDrive line of rotary steerable systems.

In November 2005, Schlumberger commercialized it's Scanner Family, the next-generation of wireline-logging services. This technology enables SLB's customers to evaluate formations more confidently and asses reserves more accurately by offering 3D downhole rock and fluid characteristics. Schlumberger is also working on technologies to extract the heavier, more viscous oils found in some wells, as well as production of hydrocarbons from frontier areas with harsh conditions.

WesternGeco, a subsidiary of SLB, commissioned a fifth exploration ship in May of 2005 and plans to convert a sixth vessel in 2006 for ocean drilling exploration. In 2005 WesternGeco's revenues grew by 34%, increasing pre-tax operating income to $117 million. There is a market demand for land and marine seismic exploration which remains extremely strong. This trend should continue, as operators embark on new exploration.

In 2005, by years end, net debt for Shlumberger dropped to $532 million compared to $1.5 billion at the end of 2004. This reduction, with the strong cash flow from operations enabled Schlumberger to increase R&D along with capital expenditure to $1.7 billion. Because of the 2005 results, the Board of Directors approved a 19% dividend increase and a two-for-one stock split that will take place in 2006.

Several trends will define activity in 2006,

1. Rig count increases will be largely limited to onshore work as the global offshore rig market will remain constrained until new builds are mobilized beyond 2006.

2. Shortage of people and equipment across the industry are likely to result in cost inflation and project delays, placing a high premium on reliable suppliers of technology and skilled personnel.

3. The technology that can improve productivity of the limited base of skilled workers will be in high demand.

4. Exploration activity is expected to have a large increase in 2006 and continue for a number of years.

Schlumberger is organized into six distinct operating groups,

Wireline - provides the necessary information to evalualte the formation, plan and well construction, and the monitoring and evaluation of production.

Drilling and Measurements - supplies directional drilling, measurements during drilling, and logging-while-drilling.

Well Services - provides services to construct oil and gas wells, along with with maintaining the optimal production during the life of a field.

Well Completions and Productivity - provides testing, completion, and oil and gas production services.

Data and Consulting Services - supplies measurment, interpretation and integration of all exploration and production of data, as well as consulting for reservoir characterization, production, and field development planning.

Schlumberger Information Solutions - providesconsulting, software, information management and IT service for the oil and gas industry.

Schlumberger also owns a 40% share of M-1 Drilling Fluids, a joint venture with Smith International. They offer drilling and completion fluids used during the drilling process.

WestrnGeco, whcih is 70% owned by SLB and 30% by Baker Hughes, provides reservoir imaging, monitoring and seimic services to the oil industry. Services range from 3D to 4D seismic surveys for delineating prospects and reservoir management.

The demand for oilfield services is substantially dependent on the level of expenditures by the oil and gas industry for the exploration, development and production of crude oil and natural gas. Oil and natural gas prices are sensitive to the reserves of oil and natural gas, and are dependent on the industry's view of future oil and gas prices. Oil and gas prices have been historically volatile. Some factors include;

The ability of OPEC to set price and production quotas

Political and economic uncertainty and socio-political unrest

The weather

My recommendation for SLB; Be greedy, BUY!

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