Schlumberger Ltd. is signaling a sharper-than-expected sequential decline in profits for the fourth quarter because of a “significantly larger drop in activity” than expected, a top executive said Tuesday.
Executive Vice President Patrick Schorn, who oversees well activity, delivered the warning at Cowen & Co.’s 8th Annual Energy & Natural Resources Conference in New York City.
During the third quarter conference call in October, he noted, Schlumberger had forecast an end-of-year decline in profits, driven by lower activity along with softening service and product pricing for fracturing in North America’s onshore. International markets were expected to see flat sequential revenue with “little to no” year-end sales.
“So far in the fourth quarter, international revenue, excluding Cameron, is more or less in line with expectations, except for signs of weakness in a few countries in Latin America,” Schorn told the audience. In North America, the offshore business revenue and land drilling operations are trending to be flat from the third quarter.
However, for the North American fracturing business, a worse-than-anticipated decline in activity in the final three months of the year may lead to a sequential revenue decline for the region “in the range of 15%,” he said.
Activity should strengthen with the new year, however.
“We continue to see the weakening of the hydraulic fracturing market as temporary, with the expectation of a gradual recovery taking place over the first half of 2019,” Schorn said. “Therefore, the fourth quarter and potential first quarter revenue declines will come with relatively high decremental margins.”
For 2019, the recent volatility in oil prices has created more uncertainty about exploration and production spend, he warned.
“Faced with this, our customers will likely respond by taking a more conservative approach to the start of 2019, as they await the current market dynamics to play out and subsequently provide better forward visibility,” Schorn said.
“We still expect to post solid revenue growth in the international markets next year, but the growth trajectory could potentially be more back-end loaded than previously thought.”
An update is planned in January when Schlumberger issues its fourth quarter results, “at which time we will have a clearer picture from further customer discussions,” as well as conclusions from the meeting this week of the Organization of the Petroleum Exporting Countries (OPEC).
There is “increased uncertainty and decreased visibility” in the oil and gas industry overall today, he said.
The slump in oil prices has slammed the energy industry in recent weeks, price of oil is dominating the headlines in the industry, with a level of volatility that has brought increased uncertainty and decreased visibility.
Cowan’s conference, he noted, has been sandwiched between the G20 meeting in Argentina last week and OPEC’s meeting, which is scheduled for Thursday and Friday in Vienna.
Trying to offer a current and “reliable outlook for our business is like walking a tightrope,” Schorn said.
Since the peak at the beginning of October, oil prices have dropped by around 30%, which he attributed mostly to a surge in U.S. production from the Gulf of Mexico and the Permian Basin, as well as record high production from the “core” OPEC members. Uncertainty also is heightened, he said, because of the Trump administration’s ongoing global trade disputes.
“There was a surge in hydraulic fracturing activity in the second quarter, especially in the Permian,” Schorn noted. However, the surge leveled off in the third quarter and is “dropping in the fourth quarter, which will show up in the first half production numbers for 2019.”
While a “normal” reaction by the OPEC members this week would be to scale back production to help restore prices, “geopolitical factors may rule otherwise, causing the current uncertainty.” There has yet to be a “major impact” on the demand outlook for 2019 oil growth demand, which is estimated at 1.2-1.4 million b/d, Schorn said. In addition, Schlumberger expects U.S. exploration and production activity, and consequently spending, “to recover during the first half of 2019.
“However, depending on the financial markets, the recovery will likely be measured initially and more closely aligned with cash flow, with the activity surge we experienced in the first half of 2018 unlikely to repeat.”