Could New Gas Cuts Hurt the Big Services Companies?

The two biggest oil-field services producers, Schlumberger (NYS: SLB) and Halliburton (NYS: HAL) , have checked in with the sort of solid fourth-quarter numbers that we had anticipated. But in the midst of their announcements, Chesapeake (NYS: CHK) , our country's second-biggest natural gas producer, has added a bit of intrigue to the picture by announcing that it will chop its U.S. gas production.

Begin with the big fella
Let's first take a gander at results for Schlumberger, the big company that continues to be my favorite in the sector. For the quarter, the company recorded net income of $1.41 billion, or $1.05 per share, compared with last year's $1.04 billion, or $0.76 per share. That's a 36% year-over-year increase on the net-income line.

Revenues were up 21% to $10.97 billion. But after you back out items, including a charge related to a now-temporary shutdown of its services in Libya, the company's adjusted earnings figure becomes $1.11 per share, a whopping penny above the expectations of Wall Street's seers, who also had predicted revenues of $10.79 billion.

Both the company's (somewhat chubby) earnings release and its post-release call reflected strong across-the-board contributions from all the company's product areas and geographic venues. Also a part of the picture is management's optimism regarding future activity both in the U.S. and internationally. From the perspective of operations, all of the Oilfield Services subdivisions (Reservoir Characterization, Drilling, and Reservoir Production) topped both the revenues and pretax income that they had generated a year ago.

Geographically, areas of noteworthy strength constituted something of a Cook's tour of a number of the major producing venues: Latin America, the North Sea, Russia, Saudi Arabia, Bahrain, and East Asia. However, geographic results tended to be "tempered" by the lingering results of the "Arab Spring" a year ago.

U.S. results benefitted nicely from a return of activity in the Gulf of Mexico, where Schlumberger's technology makes for a meaningful contribution. Importantly, that's not likely to change one iota regardless of changes in the natural-gas picture. Internationally, as CEO Paul Kibsgaard noted on his call, "[W]e secured a number of key contracts that further strengthens (SIC) our international position. This includes a shale-gas contract covering stimulation and project management for a pilot-well campaign in the Middle East."

Can Halliburton stay strong?
But if Schlumberger's quarter was solid, Halliburton's was strong, to say the least. The company reported net income of $906 million, or $0.98 per share, up from $605 million, or $0.66 a share, for the fourth quarter of 2010. Revenues were 37% higher at $7.06 billion. Adjusted EPS came in at $1 per share, topping the consensus $0.99 forecast by a whisker. The revenue expectation had been for $6.83 billion.

Regarding the company's geographic and operating breakouts, CEO Dave Lesar said, "In North America, the trend toward increased horizontal oil-directed activity continued ... with the United States oil-directed rig count up 8% sequentially compared to a natural-gas rig count decline of 3%." And as was the case with Schlumberger, Halliburton's management found the strengthening in the Gulf of Mexico "encouraging." Internationally, the company also was challenged by an Arab Spring hangover and by "delays in Iraq."

Nevertheless, Mr. Lesar expressed confidence that North American activity "will continue to focus on the development of ... liquids-rich unconventional resource base resulting in robust demand for our services." Specifically, that means continued strong activity in such liquids-dispensing plays as the Bakken, the Eagle Ford, and the Niobrara.

For the Eastern Hemisphere, margins are expected to "return to the mid- to high teens at the end of 2012 as we gain traction on new projects while growing revenue at a higher rate than rig count growth."

The Foolish bottom line
In looking at the biggest of services providers, however, I'm inclined to pony up first for Schlumberger for a couple of reasons. The first involves continued jousting between Halliburton and BP (NYS: BP) regarding relative responsibility -- and thereby liability -- for the Deepwater Horizon disaster of 2010. At this juncture, there's no way to predict how long claims and counter-claims will continue to place a cloud over both the litigants.

Secondly, and more importantly in the short term, as noted above, Chesapeake today announced that, with natural gas prices becoming almost subterranean, it will significantly cut gas drilling and production in the U.S.

Halliburton is far more leveraged to the U.S. fracking scene than is Schlumberger. Therefore, current unknowns, such as whether the likes of ExxonMobil (NYS: XOM) and other producers will follow suit -- thereby meaningfully affecting North American pressure-pumping prices -- could have a greater effect on the second-largest services provider.

So, my continued feeling is that all portfolios will benefit from at least a smidgen of Schlumberger. And while Halliburton is definitely a solid company, my two indicated concerns incline me to remain on the sidelines for now. Nevertheless, I believe that, by simply clicking on the links below, Fools should place all of the companies noted in this article on their individual versions of My Watchlist.

At the time thisarticle was published Fool contributorDavid Lee Smithdoesn't own shares in any of the companies named in this article.Motley Fool newsletter serviceshave recommended buying shares of Schlumberger and Chesapeake. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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