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Schlumberger Profit Plummets With Rig Count

The plummeting North American natural gas-directed drilling rig count contributed greatly to a more than halving of profit at Schlumberger Ltd., the world's largest oilfield services company. CEO Andrew Gould told financial analysts there is little hope for recovery this year. The leading executives at rival firms Halliburton and Nabors Industries largely agreed.

"North American gas drilling in both the U.S. and Canada reached a five-year low as demand remained weak and [gas] storage remained at levels way above seasonal averages," said Gould. "Whilst production has begun to show some decline and summer demand has been strong, it will still require a further substantial increase in demand to stimulate and sustain higher levels of drilling. We do not anticipate this will happen before 2010. "Our outlook for the remainder of 2009 assumes some stability but no major increase in the North American natural gas rig count, and as a result service pricing will remain depressed."

Schlumberger reported net income of $613 million, or 51 cents/share, versus $1.16/share in the second quarter of 2008. Second-quarter revenue was $5.53 billion versus $6.75 billion in the second quarter of 2008. Income excluding charges was $820 million -- a decrease of 13% sequentially and 42% year-on-year. Diluted earnings-per-share from continuing operations, excluding charges, was 68 cents versus 78 cents in the previous quarter, and $1.16 in the second quarter of 2008.

The biggest threat to the services industry comes form the delay or cancellation of projects by producers who are seeing their cash flows severely pinched due to low commodity prices, Gould told analysts. "Even our very largest customers are having to borrow or dip into their war chests to sustain their spending," he said. "And they'll only go on doing that for a certain period of time.

"We are also concerned that the higher finding and development costs of new supply, coupled with lower oil and gas prices and more restrictive credit markets are stifling investment flows. This situation, if it persists, will lead to inadequate supply when demand growth returns. The shape of the economic recovery beyond 2009 and the consequent recovery in oil and gas demand remain the determining factors for future activity increases."

<>Executives at Schlumberger peer Halliburton don't hold out much hope for a significant recovery during the rest of this year either. Halliburton CEO David Lesar told financial analysts during a second quarter earnings conference call Monday the fact that working gas storage could reach record levels by the end of injection season signals that "any recovery in gas drilling is likely to be relatively modest for the remainder of 2009." (see separate Halliburton report).

And Nabors Industries Ltd. CEO Gene Isenberg said the third quarter could put a floor under declines and mark the beginning of a recovery, but he's not particularly bullish. Isenberg expressed a reluctance to spend in anticipation of recovery as the company might have done during past downturns.

"As we all know, this is a poor market, and as we all know -- even though not everybody's going to admit it -- none of us knows exactly when it will end," Isenberg said. "My own guess, for what it's worth, is that we will see the bottom in the third quarter of this year, although I am certainly not looking for a V-shaped rebound.

<>"...[T]his downturn is so dramatic we're not saying we need to be prepared for the upturn by spending money now..." (see separate Nabors report)

Commodity prices at the end of this year will dictate to a large extent the 2010 plans of Schlumberger's customers, Gould said. However, there is little clarity on end-of-year prices, he said.

Given the weak market and the oversupply of oilfield equipment, consolidation could be coming among the service industry players, Gould allowed.

"I think if North America remains sort of bumping along the bottom for the next six months, then you will see some consolidation in the industry," he said. I am not saying it is going to be us. I am just saying the bumping along the bottom for the next couple of quarters, you could wear some people out."

In the North American gas patch, unconventional resources are the play of the day and tomorrow. However, their exploitation is threatened by potential regulation of drillers' hydraulic fracturing practices that could come out of Washington, DC, industry representatives have said (see NGI, July 20). Asked about this by an analyst, Gould said he couldn't predict what regulations the industry might face but that their costs likely will borne by companies like his. Whether they can be passed on to customers remains to be seen.

"I think that obviously, the situation with natural gas in the United States is such that having discovered or unlocked the enormous, huge resource, there is going to have to be a solution [to hydraulic fracturing concerns] found," Gould said. "Now, whether the solution will be positive or negative, I don't know because the one thing you can be sure of, it is going to increase the costs. To the extent that...the solution goes through some form of reporting and monitoring and the rest of it, I am pretty sure it will get pushed off to the service industry. But whether or not we will be able to charge for it is going to depend on market fundamentals..."

Unconventional plays, such as shale gas, also are in the offing in other parts of the world, but these opportunities offer a far less developed infrastructure to support driller activity, Gould said. "And the reason is because North America already has the most developed oilfield service infrastructure in the world, and therefore rigs, water carriers, all of the rest and the availability of water for this business is something that is very well understood. Whereas, with the possible exception of Germany...that is not at all the case overseas."

Nevertheless, while the North American market is particularly gloomy, Schlumberger is seeing improvement elsewhere in the world, particularly Russia, Gould said.

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