The oil and gas industry has finally “reached the bottom” of the downcycle, Schlumberger Ltd. CEO Paal Kibsgaard told investors Friday during the international oilfield services (OFS) giant’s 2Q2016 earnings call.
Kibsgaard’s assessment that the second quarter likely marks the trough of the downturn echoes comments from Schlumberger’s OFS competitors (see Shale Daily, July 20).
Since coming off lows of $27/bbl oil in January, the industry has “seen a slow-but-steady increase in oil prices as the market data continues to show a tightening of the supply/demand balance and with the outlook clearly suggesting that these trends will further accelerate going forward,” Kibsgaard said.
But the collapse of commodity prices has created unsustainable conditions in the industry value chain that will have to be corrected going forward, as service companies look to recapture pricing concessions made during the downturn, he said.
“For some time there has been a growing shortfall of both profits and cash flow from many oil producers around the world, as the cost of developing increasingly complex oil resources has outgrown the value created...The dramatic restructuring of the supply side we are currently experiencing has just accelerated and amplified the cost, quality and efficiency problems of the industry and led to a more acute cash and profitability crisis,” Kibsgaard said.
“The operators have reacted to this by initiating a massive reduction in oil activity and by sending unsustainable pricing shocks throughout the entire oil industry supply chain.”
A global supply deficit is pending, with exploration and production (E&P) spending down more than 50% and non-OPEC (Organization of Petroleum Exporting Countries) production down 900,000 b/d year/year, he said.
“As the opportunities for activity hydrating are exhausted, we should see a further acceleration in the global production decline,” Kibsgaard said, emphasizing that “the market is underestimating the potential reaction from the supplier industry, which has temporarily accepted financially unviable contracts to support the operators and to keep their options open...This is seen by the service industry profit levels and also from their ballooning receivables imbalances caused by operators who are unable or unwilling to provide timely payments.
“It also means that inevitably service industry pricing has to recover, and as it does, this will consume a larger part of the E&P [spending] increases intended for additional activity, which will further amplify the pending oil supply deficit.”
Looking specifically at the North American onshore, Kibsgaard said “a key question” will be sustainability given that “cumulative industry earnings and free cash flow were negative over the last cycle.
“And given the resulting financial state of the value chain in this commoditized market, a larger wave of cost inflation from every part of the supplier industry is now building, which the E&P companies will have to absorb in parallel with implementing their activity road plan.”
Kibsgaard said he expects North American onshore activity to see a “steady increase” in rigs and completions, along with a drawdown in its inventory of drilled but uncompleted wells.
“Now again, I think the activity will be more slow and steady, and obviously with higher utilization there is some contribution to margins, but margins are deeply negative and I would say at this stage more activity at the current margin level is just going to be dilutive to earnings,” he said.
Calling the North American market “highly stressed,” Kibsgaard said technology will have to play an important part in adding value as cost per well is “in late innings but in terms of production per well we are in very early innings, and if you want to drive down cost per barrel, we have to look at ways of getting more production out of each well...overutilization will help, but given the pain the entire industry value chain is in, there’s going to be a mounting wave of cost inflation from every supplier in that chain” that will “put significant pressure on how quickly activity” recovers.
As it looks ahead to recovery, Schlumberger is still bracing for continued weakness in 2016, releasing 16,000 employees through the first half of the year in an effort to resize for reduced activity and position for growth moving forward (see related story).The workforce reduction resulted in a $646 million in pre-tax charges.
Total revenue for the second quarter was $7.2 billion, up 10% sequentially but down 20% from the $9 billion in revenue posted in the year-ago quarter. The sequential increase reflected revenues generated by its recently-acquired Cameron businesses. Schlumberger’s merger with Cameron International Corp. closed April 1 (see Daily GPI, March 28).
North America pro forma revenues totaled $1.7 billion, down 20% sequentially as a result of the Canadian spring break-up and a decline in the U.S. land rig count. Latin America revenues declined 26% sequentially to just over $1 billion due to scaling back in Venezuela, but also due to a decrease in integrated projects in Mexico “as campaigns ended and rigs were demobilized,” the company said.
For the quarter, Schlumberger posted a net loss of $2.2 billion (minus $1.56/share) compared to a net income of $501 million (40 cents/share) in the prior quarter and a net income of $1.1 billion (88 cents/share) in the year-ago quarter.
The company recorded $2.9 billion in pre-tax charges during the quarter, including $1.9 billion in asset impairments, the $646 million related to workforce reductions and $355 million in merger and integration charges related to the Cameron acquisition.
Stay up to date on 2Q16 earnings and projections for the remainder of the year with NGI's Earnings Call and Coverage sheet.