Sorry, but you’ve just run out of excuses…

There is not a single reason left for you avoid emerging-market oil, and here is perhaps the safest way for you to play it.

We’d been watching oil-services giant Schlumberger Limited (NYSE:SLB) for a while. When it announced Q2 earnings on July 18th, we knew it was time for our emerging-market investors to get in on the action.

The commodities boom in emerging markets is real. It’s making the rich even richer, but more importantly multitudes of poor people are getting a crack, often for the first time, at an upwardly mobile life that bubbles up through the entire economy. Once this starts to happen in developing countries, you want to get in on it.

Certainly, emerging markets are working quite well for Schlumberger.

The company’s Q2 growth was helped by increased drilling efficiency in the North Sea, improved performance and lower start-up costs on projects in Mexico, Russia, eastern Siberia and South East Asia. (Just as an aside, the long-dormant North Seas also delivered favorable results for the company.)

The company said that sequential revenue increases were recorded across all Areas most notably in the North Sea, US land West, Mexico/Central America, US land Central, Arabian, and Peru/Colombia/Ecuador. In addition, double-digit growth rates were recorded by the China/Japan/Korea, Thailand/Vietnam and Australia/Papua New Guinea.

In Latin America, oil-field service revenue of $1.06 billion increased 15% sequentially and 39% year-on-year. Pretax operating income of $243 million increased 31% sequentially and 36% year-on-year. While Venezuela and Argentina were particularly active with new wells, the company saw improved activity throughout the region.

The combined European, so-called CIS (the Commonwealth of Independent States — formerly the USSR) and African region is also bustling for Schlumberger.

Revenue of $2.07 billion increased 9% sequentially and 28% year-on-year. Europe’s gain was pegged on a North Sea resurgence. West and South Africa and East Russia all saw increases in exploration-related activities.

When it comes to Africa, Angola and Ghana proved a reliable source of revenue. In both cases, Schlumberger benefitted from new and deeper wells. CIS, meanwhile, produced leading-edge technology exploration as well as contracts for up to 10 new rigs north of the Arctic Circle.

On the other side of the planet, the Middle East and Asia saw revenue of $1.44 billion increased 9% sequentially and 19% year-on-year. China, Japan and South Korea rebounded after a winter slowdown. More importantly, though, is the growth in exploration in Australia and Papua New Guinea. Thailand and Vietnam contributed to growth through additional exploration.

In offshore Qatar, Schlumberger was part of a consortium that established several world records by drilling the world’s longest well in the Al Shaheen field. This pertains to peak-oil theorists, but right now we can’t figure out on which side of the table. Schlumberger is digging deeper because the oil is harder to find; on the other hand, technological advances are enabling deeper wells.

We don’t claim to be geologists, but it seems that this kind of deep drilling could simply keep on going — that eventually some new technology lets us go further into earth to find new oil.

Well, how does North America stack up against these emerging markets? Not too good, actually.

North American revenue of $1.44 billion increased only 1% sequentially and 7% year-on-year. That’s virtually no growth compared to the dynamic markets we’re seeing elsewhere in developing economies.

And thanks to these emerging economies, Schlumberger was able to post healthy Q2 numbers over all. Here’s the top line…

Schlumberger reported Q2 revenue of $6.75 billion versus $6.29 billion in the first quarter of 2008, and $5.64 billion in the second quarter of 2007.

Income from continuing operations was $1.42 billion-an increase of 9% sequentially and 13% year-on-year. Diluted earnings-per-share from continuing operations was $1.16 versus $1.06 in the previous quarter, and $1.02 in the second quarter of 2007.

Schlumberger is a great energy play for investors still a bit skittish about going straight into emerging markets. It’s a big-board American company that should give you a good night’s sleep while letting you gain from the hottest markets anywhere.

–Irwin Greenstein

Tags: CIS, Oil, Schlumberger

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