Oilfield service companies due for tough quarter

By Anna Driver - Analysis

HOUSTON (Reuters) - Oilfield service companies, including bellwether Schlumberger Ltd (SLB.N), must work harder to deliver on the bottom line in the fourth quarter due to a slowdown in North America and weather disruptions in markets such as the North Sea.

In the long haul, booming demand and tight supplies mean profit growth for most companies that help energy firms drill for and produce oil and natural gas, but the near term may be bumpy as expectations are ratcheted down after years of heady profit and revenue growth.

"The North American market is likely to be weak in 2008," Waqar Syed, director of institutional research at Tristone Capital. "When it slows, it slows down the overall growth that the service companies have been enjoying so far."

The world's largest oilfield services company, Schlumberger, is due to report earnings on January 18.

In the third quarter, Schlumberger's North American results disappointed investors, who sent the company's shares down as much as 12 percent, a decline that also weighed on the sector.

MORE TO COME?

And others, citing weakness in North America and other factors, caution that expectations are still too high.

In a note to clients on January 9, Goldman Sachs analyst Charles Minervino wrote there is "... little chance for significant earnings outperformance or upwards estimate revisions," and recommended investors buy after earnings.

The stocks have been on a great run. In 2007, the Philadelphia Stock Exchange index of oilfield service companies .OSX rose 51 percent, compared with a 3.5 percent gain in the Standard & Poor's 500.

Drilling in Canada has slowed considerably as exploration and production companies cut back on spending in the wake of coming changes to the royalty structure in Alberta.

And weakness in prices has also dogged companies in the U.S. pressure pumping market after high energy prices brought a number of smaller players to the market, causing oversupply.

Halliburton Co (HAL.N), Schlumberger and BJ Services Co (BJS.N) hold the largest market share in U.S. pressure pumping. That process is used to extract natural gas in hard to reach pockets in substances such as shale.

To insulate against a maturing North American market, companies such as Weatherford International Inc (WFT.N) and Halliburton focused on growth in international markets.

"The international business is growing still and is expected to show nice growth in 2008 and 2009, so the companies that have the biggest exposure should do all right," said Joe Agular, an analyst at Johnson Rice.

He said those companies include Schlumberger, Smith International Inc (SII.N) and Baker Hughes Inc (BHI.N).