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North America Onshore Crashing, But Opportunities Exist, Says Schlumberger CEO

Schlumberger Ltd. is working "actively" with North American customers to lower drilling costs and to renegotiate contracts, with a big push toward technology and efficiency offerings, CEO Paal Kibsgaard said Friday.

Lower oil prices have led to a "dramatic drop-off" in exploration and production (E&P) activity and "crashed North American land," he told analysts. Schlumberger is the No. 1 oilfield services provider in the world, with the bulk of its revenues coming from North America.

During the final three months of 2014, global gross domestic product "softened somewhat while growth is still expected to be 3% in 2015, confirming that the global economic recovery is intact," Kibsgaard said in an upbeat conference call. "As a result, demand for oil continues to increase, but significantly higher marketed supply has led to a dramatic fall in oil price.

"As E&P investment falls in response, decline rates will impact oil production capacity, while sharply lower E&P activity will delay supply additions. At the same time, markets for natural gas remain comfortably supplied in North America," but new liquefied natural gas capacity additions in Asia and weaker demand in Europe have pressured prices in those regions.

The U.S. drilling rig count fell by 74, all land rigs, to settle at 1,676 for the week ended Jan. 9, Baker Hughes Inc. reported Friday. It's the lowest U.S. total since October 2010 and is down 101 from a year ago. The domestic rig count now has fallen for seven straight weeks, down 244 units.

“In this uncertain environment, we continue to focus on what we can control,” Kibsgaard said. “We have already taken a number of actions to restructure and resize our organization that has led us to record a number of charges in the fourth quarter. We are convinced that performance must now be driven by an accelerated change in the way we work through our transformation program."

Delivering "new technology that improves the performance of our customers' reservoirs" is key, said Kibsgaard. Also priorities are working on ways to increase efficiency and reliability to reduce overall finding, development and production costs."

That said, there are "opportunities for growth from more integration," which can become "significant drivers of our own and our customers' performance. Tangible results have already been recorded and, as we accelerate the benefits of the transformation program across both technologies and geo markets in 2015, we believe we are well-placed to outperform."

Fourth quarter results proved better than Wall Street had expected. Schlumberger in December said it would take a $1 billion charge in 4Q2014. A $296 million charge was associated with a global headcount reduction 9,000, about 7% of its workforce. Primarily as a result of the recent decline in commodity prices, Schlumberger also determined that the carrying value of its investment in a project in the Eagle Ford Shale was more than its fair value, which led a $199 million charge.

Factoring in the one-time impairments, net income declined to $302 million (23 cents/share) from $1.66 billion ($1.26) in 4Q2013. Minus the charge, profits increased 11% to $1.50/share, beating estimates of $1.46. Revenues climbed 6% to $12.64 billion, mostly on efficiency gains in North America.

North America 4Q2014 revenue of $4.3 billion increased 2% sequentially, with land revenue up 5%. Land revenue increased both in the United States and Western Canada on higher pressure pumping activity, continued efficiency improvement and higher uptake of new technology, specifically for the BroadBand family of services.

Quarterly activity in the U.S. Gulf of Mexico was up 12% year/year on multiclient license sales and resumption of operations after loop current disruptions in the third quarter (see Shale Daily,Oct. 17, 2014). Eastern Canada revenue declined sequentially following completion of the season's exploration program and marine seismic activity.

North America pretax operating margin increased 24 basis points (bps) sequentially to reach 19.6% on increased Western Canada activity, continued efficiency gains, increased penetration of new technology and improved recovery of logistical costs in U.S. land. North America offshore operating margin improved on a better revenue mix from high-margin multiclient license sales.

It's still unclear how much North American E&P activity will decline in the coming months, but Schlumberger is preparing for all scenarios, Kibsgaard said. Volatility is nothing like the Great Recession in 2009, however, and margins are better protected today. "I will be very disappointed if we don't do significantly better than in 2009."

The U.S. land rig count has fallen 400 rigs from October, the CEO noted. With the sharp decline happening so quickly, Schlumberger is trimming costs by doubling asset utilization and pushing technology and efficiencies.

The "first indications" of whether the pullback in oil drilling is impacting global capacity won't be seen until the second half of this year, Kibsgaard predicted. However, the company's technology offerings remain "at premium pricing," and they contribute about 25% of total revenue.

"We have the unique capability to exceed 30% of total revenue...and in 2015 we are aiming to make further progress" on that front, Kibsgaard said. "The transformation requires us to work differently with customers to further realize the value for them and the value for us...In the current business environment, we are engaged with many of them with a very positive response...Still, given the level of oil prices and the focus on reducing E&P costs, a challenging year is in front of us. We are fully focused, and we understand changes to plans."

The production group, which includes technologies and pressure pumping services in North America, reported a 5.5% increase in profits during 4Q2014. Reservoir characterization and the drilling groups units declined sequentially by 2.8% and 3.4%, respectively.

The lower reservoir activity followed a seasonal decline in marine seismic work, while drilling "suffered from currency effects and seasonal declining activity in Russia," Kibsgaard said. Year-end software, product and multiclient license sales of $260 million mainly benefited production and reservoir business, but sales were weaker than usual as customers reduced discretionary spending.

Schlumberger has cut its 2015 capital expenditure budget by 25% from 2014 to $3 billion. More cuts could be made, depending on the market, said Kibsgaard. However, the board is optimistic, approving a 50 cent dividend increase beginning April 1.

"In combination with our continuing share repurchase program, this clearly underlines the confidence in our ability to generate superior cash flows in spite of the more challenging environment," Kibsgaard said.

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