Schlumberger Ltd., the world's largest oilfield services operator and industry bellwether, delivered somber third quarter results, with CEO Paal Kibsgaard warning that the worst isn’t over.
During a lengthy conference call Friday morning, Kibsgaard said the fourth quarter now "looks challenging and visibility had actually dropped in the past month or two...We also expect rig activity in North America land to be down in the fourth quarter because of the financial stress on many of our customers there, and we expect very limited year-end sales of product, software and multiclient…”
The first quarter actually looks like it’s going to be worse than the last three months of this year.
Schlumberger's macro view "has not changed in terms of a tightening supply and demand balance and an expected improvement in oil prices," but "we have to factor in that the likely recovery in our activity levels now seems to be a 2017 event."
There’s no optimism about "any turnaround in service and product pricing for oilfield services in North America land...Many of the small companies, or most of the small companies, are free cash flow negative. They are under significant financial stress and maybe some of them will go bankrupt in the coming quarters or in the coming year.
"But there is still massive overcapacity, and even these small companies that go bankrupt will likely be picked up other investors and their assets will be returned back into the market. So I think the overcapacity is going to be with industry for quite a considerable amount of time. I don't expect any real improvement in service and product pricing in the coming year in North America land."
Exploration and production (E&P) activity "clearly worsened" during the third quarter and actually is dimmer. Schlumberger now is managing the business quarter by quarter. It plans more job layoffs and capacity reductions as well. It ready has fired about 20,000 people worldwide since the start of the year (see Shale Daily, April 17; Jan. 16).
Based on conversations with E&P management teams, capital spending should decline in 2016 for the second year in a row, "the first time since the 1986 downturn, when the spare capacity cushion was more than 10 million b/d," Kibsgaard said.
"In spite of the need for the industry to increase investment levels to mitigate the pending impact on global supply, we instead see an increasing likelihood of a timing gap between the expected improvement in oil prices and the subsequent increase in E&P investments and oilfield services activity…
“But I would say also that there is a limit to how long these reductions in investment and activity can continue. And I think as the oil price now likely will start to move upwards, hopefully investments will turnaround, but anything meaningful will be late '16 and into 2017 as we see it today."
The market "is probably overestimating how quickly the industry can respond, whether it's in North America or internationally," Kibsgaard said. "I think the fact that we are now four quarters into very low oil prices, the financial strength of many of our customers has significantly weakened, and their appetite to invest is also a bit down.”
As service pricing in U.S. land fell further during 3Q2015, Schlumberger began to concentrate activity in core areas and for key customers. In some instances, work continued at at “noncommercial prices,” or in other words, at a loss, said the CEO.
“We view this as an investment decision and apply the same justification and approval process used for any other reinvestment we do in our business,” he told analysts. “This has allowed us to move equipment and crews between basins as we look to balance market share with margins and as we pursue new technology opportunities.
“We believe that this approach has enabled us to protect our profitability in North America land and has also helped us maintain our overall infrastructure and long-term ability to service our customers in this market.”
Schlumberger’s net income during 3Q2015 fell by almost half year/year and it was down 12% sequentially to $989 million (78 cents/share). Revenue dropped by one-third and declined 6% sequentially to $8.47 billion, while cash flow plunged to $2.53 billion from $7.28 billion.
Drilling Group revenue fell 7% sequentially "driven by weakening drilling activity and by persistent pricing pressure" in both North America and the international areas. Production Group and Reservoir Characterization Group revenues each declined 5%.
Schlumberger still was "able to deliver pretax operating margins well above those seen in any previous downturn, and we have continued to generate significant liquidity with free cash flow of $1.7 billion in the third quarter, representing 170% of earnings,” Kibsgaard said.
In North America, revenue fell 4% sequentially to $2.3 billion. However, the company outperformed an overall 7% decline in the U.S. land horizontal rig count. North America pretax operating margin declined 136 basis points sequentially to 9%.
Despite the job losses and capacity cutbacks, Schlumberger’s North American operations "enabled an increase in people productivity through the combination of 'multiskilling,' remote operations and innovative technology deployment," Kibsgaard said.
In Alaska, by cross training logging-while-drilling engineers in directional drilling, and by assigning key responsibilities for the various phases of the operations that included one remote operations expert working in a Drilling Technology Integration Center, Drilling & Measurements reduced their rig crew from five to three. The reduction at the wellsite "saved the customer $180,000 in annualized costs.”
Despite the uncertainty, Schlumberger is continuing to pad its portfolio. In August it agreed to a $14.8 billion deal to buy Cameron International (see Daily GPI, Aug. 26). In September it bought U.S.-based Novatek Inc., which specialize in synthetic diamond technology primarily for the oil and gas industry (see Shale Daily, Sept. 4). Last month it also acquired U.S.-based T&T Engineering Services Inc., which specializes in land rig design.
"At Schlumberger, we remain confident in our capability to weather this downturn significantly better than our surroundings," Kibsgaard said.
"Through our global reach, the strength of our technology offering, and our transformation program we are creating the leverage to increase market share, post superior earnings, and continue to deliver unmatched levels of free cash flow while bringing value for our customers through improving production, increasing recovery, and lowering cost per barrel."