A plethora of unconventional natural gas supplies in the United States, as well as global liquefied natural gas (LNG) growth, "will limit the progress of prices," Schlumberger Ltd.'s CEO said Friday.

Still, "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," Andrew Gould said. "Increased service capacity, however, will negatively affect pricing at some stage during the year."

Gould made the comments during a conference call to discuss the company's quarterly and year-end earnings reports.

Schlumberger beat Wall Street earnings forecasts with reported 4Q2010 income of $1.16 billion (85 cents/share), which was 33% higher sequentially from 3Q2010 and 42% higher year/year. Quarterly revenue jumped to $9.07 billion versus $6.85 billion in 3Q2010 and $5.74 billion in 4Q2009.

The latest results reflected a full quarter of activity from the acquired Smith International Inc. businesses, which contributed 4Q2010 revenue of $2.49 billion and pretax operating income of $275 million. Schlumberger, which is the largest oilfield services operator in the world, acquired Smith, a shale services leader, early last year (see Daily GPI, Feb. 23, 2010).

"Fourth-quarter activity in North America remained strong through increased activity in liquid-rich plays and improvement in Canada," Gould said. "Stronger pricing and the restructuring efforts across the area continued to contribute to margin expansion, particularly at Well Services...The acquired Smith businesses continued to outperform our original expectations with the revenue synergies achieved through the acquisition increasing in each successive month of the quarter."

The primary driver of Schlumberger "has always been, and will remain, the demand for oil and gas," the CEO said.

"For oil, 2010 turned out to be the year of the second-largest demand increase in the last 30 years. 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, which remains the swing factor in operators' budgets.

"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," he said. Schlumberger estimates that he impact of the U.S. deepwater drilling moratorium was 4-5 cents/share in 4Q2010.

While oil demand is strong, gas demand services have been "less marked because of surging supplies of unconventional gas and LNG," Gould said. "Overseas, the governing factor on gas activity, particularly in the Middle East, will be the ability of many nations to use gas as a substitute for oil to meet increased local energy demand, thus freeing up more liquids for export. Elsewhere the long lead time necessary to execute large gas projects for LNG exports will ensure that a certain level of activity is maintained.

"Unconventional gas resources will continue to attract considerable interest outside North America. The leading activity will continue to be gas in tight, or low permeability, reservoirs, and in coalbed methane developments. There will be exploration activity around the potential that shale gas offers in many other parts of the world."

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," said Gould.

Standard & Poor's (S&P) said the company's results in 2011 should improve because of increased international deepwater demand, but "we are concerned about a pullback in U.S. land activity in the second half of 2011 given chronically low gas prices." S&P rates the shares at "hold."

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