The lack of pricing power in international markets continues to weigh on the Big Four. With elevated commodity prices and the international rig count up considerably from its 2008 high, one would expect the services firms to be able to raise their prices. Two factors have undercut the industry’s pricing power: the Arab Spring and vicious price competition between the major services companies.

Civil unrest delayed projects in Libya, Algeria, Tunisia and Egypt. Schlumberger (NYSE: SLB) and Weatherford International (NYSE: WFT), both of which have significant operations in Libya, had to pull out of the country during the civil war. But Libyan oil output has recovered more rapidly than many analysts expected; the country is only a year away from restoring production to prewar levels, an impressive feat.

The pricing war in international markets has weighed on the Big Four’s profit margins and offset the upsurge in drilling activity. Management teams are betting that the short-term hit to margins will be more than offset by gaining a foothold in regions where E&P activity is expected to grow dramatically in coming years.

Schlumberger CEO Paal Kibsgaard summed up the competitive dynamic best during a conference call to discuss fourth-quarter earnings:

Paal Kibsgaard: We still see competitive pricing for basic technology on large contracts, while we see some positive signs on the smaller contracts. On the large contracts, our unique high-end technology is obviously priced higher and we always have significant sell-up potential as the contracts unfold over the years. If you look at the international service pricing, typically there’s a lag between the moves in the rig rates, which we have been seeing over the last couple of quarters, and our service pricing.

So there’s a potential upside on that. But I think one reason why pricing has moved so much in the international market is the market share plays that have been going on, and I think these are potentially coming to an end.

Partly, that’s going to come down to the activity increase that we potentially will see, but I think also another key factor to this is that there is a growing customer emphasis on operational performance. I think they are fully realizing that very low service pricing typically gives very low service quality. And I think one example of this is the rate that we continue to replace competition within our Drilling & Measurement segment. In Q4 alone, the ratio of we replacing competition and them replacing us was 31 to 5, and this is basically coming down to quality and technology.

Analyst:  Sure. Is it still prudent to think of a pricing inflection internationally as being more of a positive for your 2013 margin outlook, or is this something that we potentially start to see having an impact in the second half of this year?

Paal Kibsgaard: I think it’s still too early to say. Like I said, we continue to test pricing on smaller bids. For the big bids–and there’s not really that many big bids coming up in the coming year–we’d obviously be a little bit more conservative to make sure we protect and potentially gain market share. But I think it’s too early to call it. The only thing I would say is that there was a growing focus on operational performance, and that plays very well into our strength in terms of our quality and our technology.

In this excerpt, Kibsgaard indicates that price competition becomes cutthroat on large-scale international projects, megadeals that can dramatically increase a service company’s market share in a region.

But Schlumberger has successfully pushed though price increases on smaller contracts with fewer counterbids. As Kibsgaard notes, Schlumberger’s superior technology and operational performance also enables the firm to win work and pad its margins.

From leasing a drilling rig to staffing the unit with seasoned hands, the daily costs of deepwater drilling can easily exceed $1 million. In this environment, time isn’t just money–it’s a lot of money. In this environment, a services firm that can perform its job more efficiently and on schedule can produce meaningful cost savings.

With day rates on deepwater drilling rigs on the rise, E&P firms are starting to reward service providers that can complete assignments quickly and efficiently. According to Kibsgaard, Schlumberger replaced a competitor on 31 jobs in the fourth quarter and only lost five assignments to another firm.

Encouragingly, management teams from Schlumberger and Halliburton (NYSE: HAL) agreed that weaker-than-expected margins in international markets resulted from intense competition for market share rather than overcapacity or a decline in demand. Price competition will fade as activity continues to ramp up and producers favor efficiency over price.

A meaningful turn in international margins could prove to be the catalyst that enables shares of the Big Four services firms to recover their historical price multiples. The timing of this inflection point remains murky, but Kibsgaard’s comments suggest that conditions are improving. Growth Portfolio holdings Schlumberger and Weatherford International stand to gain the most from this trend. Schlumberger rates a buy up to 100, while Weatherford International rates a buy up to 17.50.