Schlumberger (SLB) delivered solid Q4 results Friday. The company beat on revenue and eps. The stock ended up slightly on the news, in line with broader markets. Below is my takeaway on the quarter.

North America Was Not As Strong As Expected

North America land drilling has been the white hot sector of the oil services industry. For the week ended January 12, 2018, the U.S. rig count was up over 40% Y/Y and up by 15 versus the previous week. However, the rig count was practically flat compared to 939 at the end of Q2. Schlumberger's total revenue was up 3% sequentially; however North America was only up by 8%. That pales in comparison to Q3 18% growth from North America.

Management touted the additional fleet redeployments at OneStim and increased product sales from Cameron's Surface and Drilling Systems. With oil prices hovering near $70 I expected double-digit revenue growth from the region. If oil prices stagnate or the rig count plateaus Q4 might be as good as it gets for North America.

Revenue from Latin America was stalwart this quarter, up 9% Y/Y. Drilling activity in Argentina and Columbia was robust. Higher project volume from Schlumberger's OneSubsea also contributed to the increase. OneSubsea provides equipment for the subsea oil and gas market. Oil prices at or above $70 could awaken the subsea market and make Schlumberger's acquisition of Cameron pay off in spades. It could also potentially provide the next catalyst for the company and help differentiate itself from land drilling competitors.

EBITDA Margins Faltered

Prior to the sharp oil price decline in the second half of 2014 Schlumberger had EBITDA margins in the 29%-30% range. Margins diverged to the downside after oil prices fell; it also acquired Cameron, which had margins in 18%-20% range, in Q3 2015. Margins have been in the mid-to-low 20% range since Q2 2016, and fell to 20% this quarter. What gives me pause is that margins fell despite the sequential increase in revenue and continued head count reductions by management.

Cost of sales ticked up 2% sequentially, which implies Schlumberger could be working harder to achieve top line growth. The company could be offering some price concessions, particularly in North America, where the rig count appears to have plateaued. Schlumberger also exited the seismic acquisition business which was beset by generic technology:

It has also become clear to us that our customers are unwilling to pay a premium for our differentiated seismic measurement and surveys, and they clearly believe that generic technology and performance is sufficient. In general, this approach commoditize the seismic data acquisition business and creates a very low technical barrier to entry for smaller players, who steadily adds vessels and keep the market in a chronic state of overcapacity.

We are therefore reached the conclusion that the seismic acquisition business cannot provide the full-cycle returns we require in terms of operating margins, free cash flow generation and return on capital employed nor can it compete for our internal allocation of R&E funding for capital investments.

This exit could potentially lead to higher margins going forward without a substantial loss in revenue.

$3 Billion In Write-Offs Did Not go Unnoticed

Schlumberger had over $3 billion in write-offs during the quarter, which did not go unnoticed. About $1.4 billion was related to the write-off of the seismic acquisition business. Another $938 million was related to write-down of investments in Venezuela. Management said it would continue to maintain a presence in Venezuela. However, the asset write-off likely reflects the deep economic problems facing the country, which could metastasize to the rest of Latin America. With Weatherford (WFT), Schlumberger, Halliburton (HAL) and Baker Hughes, a GE Company (BHGE) in hot pursuit, Latin America could become the next major battleground for new business.