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Schlumberger Weighing Whether to Shutter Some U.S. Ops or Wait Out Downturn

Schlumberger Ltd., the No. 1 oilfield services operator on the planet, eliminated more than 8,000 people from its workforce between January and March, but the sour business environment may take even more jobs before the end of June, CEO Paal Kibsgaard said Friday.

The worldwide headcount for the bellwether of the oil and gas industry has fallen to about 92,500, including the loss of 5,500 contractors, he said during a conference call to discuss first quarter results. Schlumberger is far and away the largest employer among oilfield services contractors. No. 2 Halliburton Co., which is set to deliver its results on May 3, employed 65,000 at the end of 2015 (see Daily GPIMarch 10).

"During the first quarter of 2016, the decline in global activity and the rate of activity disruption reached unprecedented levels as the industry displayed clear signs of operating in a full-scale cash crisis," Kibsgaard told analysts. Budgeted exploration and production (E&P) "spend fell again and substantially affected our operating results."

As bleak as conditions were in the first quarter, the environment looks equally rough through at least June.

"This environment is expected to continue deteriorating over the coming quarter given the magnitude and erratic nature of the disruptions in activity," the CEO said. In particular, North America has reached a "critical mass" stage as E&Ps are not spending on anything but necessities.

The company is evaluating whether there's more benefit in keeping some North American operations operating at a loss, or completely shuttering some areas, then when conditions improve, ramp up. Closing some operations would lead to a longer lag time in recovery, Kibsgaard said.

As pessimistic as it is, Schlumberger is confident about a rebound in 2017, with strengthening expected later this year.

The current oversupply of oil, led by North America, should result in a "drop to almost zero by the end of the year," Kibsgaard said. "We believe the oil market is in the process of balancing," as output falls in the United States, China, Colombia, Mexico and the UK.

Everything depends on the direction of spending by E&Ps. There is zero incentive today to fork out any capital, and nearly all of them have shaky balance sheets.

"The appetite might come up together with the oil price," Kibsgaard said of E&P spending. But don't look for it to happen before summer, and don't look for U.S. independents, historically the leaders in ramping up, to be at the vanguard, he said. This time around, the international operators, including the Middle East and Russia, likely will lead the charge in getting back to work.

"The industry is now in the deepest financial crisis on record," Kibsgaard said. "This is the toughest environment we've seen in 30 years, and it is likely to get even tougher before the market turns."

Net income declined 63% in 1Q2016 from a year ago to $501 million (40 cents/share) from $1.358 billion ($1.06). The pre-tax operating margin slumped to 13.8%, down 281 basis points (bps), from 19.4% a year ago and 16.6% in 4Q2015. Overall, revenue fell 36% and declined 16% sequentially.

North American Revenue Falls 55%

Schlumberger's largest operating segment, North America, precludes what is expected from onshore operators as they unveil their 1Q2016 results in the weeks ahead. Revenue fell by more than half (55%) from a year ago to $1.464 billion and slumped 25% from 4Q2015.

North America land revenue fell 29% from a year ago on "lower activity, continuing pricing pressure and the early onset of the Canadian spring break-up," Kibsgaard said. "Offshore revenue decreased 18% on reduced activity project delays, and lower multiclient seismic license sales.

North America pretax operating margin declined 777 bps sequentially to minus 1% "as the downturn deepened causing further E&P spending cuts, and as widespread operational disruptions prevented prompt cost adjustments. While focus was maintained on balancing market share position and profitability, the economics of temporarily shutting down operations were weighed against the cost of maintaining resources.

"As a result, decremental operating margin increased from 20% to 30% sequentially. We will continue to tailor service capacity to activity while preserving long-term operational and technical capabilities, and we will also remain cautious in adding capacity once activity shows signs of recovery."

Compared to the fourth quarter, the first quarter's revenue decline "was one of the steepest...we have posted since this downturn started," Kibsgaard said. At the end of March,the U.S. land rig count "had fallen to around 400, representing a drop of 80% from the peak of October 2014." Meanwhile, international revenue, including in Canada and Mexico, declined 13% "from a combination of customer budget cuts, activity disruptions, seasonal winter slowdowns and continued pricing pressure."

The drilling unit's quarterly revenue fell 16% from the fourth quarter, while the reservoir characterization business saw a 20% decline because of lower demand for exploration- and development-related products and services. Production group revenue was down by 11%, attributed to lower pressure pumping services in North America.

"Meanwhile, E&P spending cuts continue," Kibsgaard said. "Recent spending surveys for 2016 now indicate sharper declines than previously forecasted. Global spending reductions in 2016 are approaching 25%, corresponding to reductions between 40% to 50% in North America and around 20% internationally."

Still, Schlumberger's outlook for tightening global oil market conditions remains unchanged. It's going to get better, the CEO said. It's just taking much longer than anticipated.

"In navigating this landscape, we remain focused on balancing market share against profitability, while also working to best preserve the core capabilities of the company for the long term. We will continue to tailor costs and resources to activity, while remaining cautious in adding back capacity given the unpredictable nature of the current market."

Management remains "optimistic and confident about the medium-term outlook for Schlumberger. Our unmatched ability to generate cash in the oilfield services industry allows us to capitalize on a variety of significant business opportunities while continuing to return cash to our shareholders through dividends and stock buybacks."

And even during the unprecedented downturn, Schlumberger during the first quarter completed a $14.8 billion takeover of Cameron International Corp., giving it more heft in technology offerings (see Daily GPIMarch 28Aug. 27, 2015).

Cameron is now the fourth product group, alongside the existing reservoir characterization, drilling and production groups. Cameron's first quarter revenue was $1.6 billion, flat from a year ago.

The overhaul of the company and the Cameron merger "leaves us very well positioned once markets start to recover," Kibsgaard said. Besides Cameron, Schlumberger during the first quarter acquired UK-based Meta Downhole Ltd., an engineering and service company that offers downhole metal-to-metal isolation solutions in well integrity applications. It also acquired Asset Development & Improvement Ltd., a UK-based consultancy to the industry.

Technology Offerings A Bright Spot

During the first quarter, Schlumberger was selected as the sole technology and service provider for the Department of Energy's National Energy Technology Laboratory's Marcellus Shale Energy and Environment Laboratory Consortium. The consortium was formed with West Virginia University, Northeast Natural Energy LLC and The Ohio State University to monitor unconventional natural gas production in Marcellus wells.

Schlumberger's objective is to "better understanding the wells' long-term production performance, environmental and social impact," as well as optimize "protective management and well treatment strategies for future unconventional developments in the region."  The project wells "were successfully completed and are now in production with encouraging initial results," the operator said.

In the U.S. land segment, the company refractured several wells in the Williston Basin for Enerplus Resources. An analysis found work resulted in a three-to-sixfold production increase among four wells that were refractured.

In the Woodford Shale, Schlumberger achieved record footage for BP plc using a fit-for-purpose design to improve the rate of penetration and reduce the number of bits required to drill the lateral wellbore, "resulting in a 71% improvement in footage drilled compared to the average of the top 10 comparable offset wells," the company said. It shaved 24 days off the average work schedule and saved $1 million.

Schlumberger also completed a 3-D vertical seismic profile data acquisition program for BP Exploration and Production Inc. in the Gulf of Mexico. Using a 100-level receiver array conveyed on wireline cable, it set a new record with a total of 47,874 shots over a spiral survey grid with a cumulative distance of 1,380 kilometers.

And in Canada, the WesternGeco unit received underwriting for a deepwater 3-D multiclient survey for the Flemish Pass offshore Newfoundland. Seismic acquisition is beginning this quarter, with the first images expected later in the year. More measurements are planned in 2017.

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