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Schlumberger to Lay Off More People as Upstream Investments Disappear

Schlumberger Ltd., the world's largest oilfield services operator, plans to reduce its workforce even more on the expectation for less activity in 2016, the president of operations said Tuesday.

The industry is facing a second consecutive year of falling upstream investment "for the first time since the mid-1980s," Patrick Schorn told an audience at Cowen & Co.'s Fifth Annual Ultimate Energy Conference in New York City. Schlumberger is seeing its "most significant drop" in business since 1986.

"Looking at the U.S, alone, where the activity decline has been the sharpest, the rig count in the third quarter showed a limited increase to return to the level of the 2008-2009 downturn. However, the fourth quarter is seeing a further leg down that can be expected to reach a new record low."

In the United States, he said, the land rig count that breached 900 on $60 West Texas Intermediate (WTI) at the end of June "quickly declined to a new low as commodity prices fell significantly lower. We now believe that a bottom well below the current low 700s is likely before the downturn ends with a 10-12% decline by the end of the fourth quarter."

In this type of market, the company's approach has been to concentrate activity in core areas and for key customers while stacking equipment rather than operate at a loss. “However, when we have decided to pursue work at less-than-commercial prices, we have viewed it as an investment decision, rather than as an attempt to simply buy share."

Schlumberger has moved equipment and crews in the United States "from basin to basin as we balance market share with margin and pursue new technology opportunities. We believe that this balance has helped ensure our strength in overall profitability in the North American market while continuing to maintain our overall infrastructure and long-term service capacity. In addition, we expect to be able to keep our margins above those of previous downturns.

"In the current market, however, we also expect year-end product, software and multiclient sales to be weak and unable to offset seasonal weaknesses as we enter winter in the northern hemisphere."

It's also "become clear" to management "that any recovery in activity has been pushed out in time, although light tight oil production in North America is clearly on the decline. There is a considerable inventory of drilled but uncompleted wells in unconventional resource basins that can rapidly be brought on production. As the price of WTI rises, these will be completed to add production before any significant rise in drilling activity is required. We do not therefore expect to see any meaningful increase in service pricing traction until the vast pool of idle service company assets has been considerably reduced."

Schlumberger, whose operational headquarters are based in Houston, began an overhaul of its business three years ago as unconventional activity in North America increased. The revamp since the downturn in late 2014 has been accelerated, Schorn said.

The company in January laid off close to 11,000 employees, or 15% from 3Q2014 levels (see Shale DailyApril 17). At least 20,000 jobs have been cut overall since the start of the year (see Shale Daily, Oct. 16).

"However, the latest leg down in activity has led us to again evaluate our staffing levels against expected activity," he said. "Following which, we will further right size the organization based on the activity outlook for 2016 and streamline our support structure. This will result in a restructuring charge currently estimated at $350 million in the fourth quarter."

Schlumberger did not disclose how many more jobs may be cut.

There are several things that the company cannot control, he told the audience. Now the focus is to deliver technologies and business models that are more integrated. The goal is to have new technologies at premium pricing that could contribute more than 25% of revenue by 2017.

The $14.8 billion agreement to acquire Cameron International Corp. remains a go, Schorn said. The tie-up was announced in August (see Shale DailyAug. 27). The merger still requires some regulatory approvals; it received unconditional clearance by the U.S. Department of Justice in mid-November. Closing is expected early next year.

"Our business performance in both North America and internationally has displayed considerable resilience as the market continues to decline. In this environment visibility continues to be considerably reduced and we will need to manage the company on a quarter-by-quarter basis. This will mean a further reduction in the size of the workforce in the fourth quarter as we adjust resources to lower activity levels, which will result in restructuring charges in addition to a charge related to our global manufacturing and distribution network. We will also be conducting an asset impairment test in the fourth quarter and are in the process of working through all of these items."

However, the "timing gap" between higher oil prices and an increase in oilfield services activity "will depend on the reversal of financial pressure on our customers."

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