Soft pricing and lower onshore activity pressured Schlumberger Ltd.’s North American results in the first quarter, and there’s likely to be a continued downturn in the land business this year, CEO Paal Kibsgaard warned Thursday.
The Schlumberger chief helmed an early morning conference call with his management team to discuss the 1Q2019 results. He highlighted a strengthening overseas business environment, particularly for the offshore, but poo-pooed any potential strengthening for the unconventional exploration and production (E&P) business.
“The higher cost of capital, lower borrowing capacity, and investors looking for increased returns suggest that future E&P investment levels likely will continue to be dictated by free cash flow,” Kibsgaard said.
“We therefore see E&P investments in North America land down 10% in 2019. In addition, rising technical challenges from parent-child well interference, step-outs from core acreage, and limited growth in lateral length and proppant per stage all point to more moderate growth in U.S. shale oil production in the coming years.”
Conversely, international E&P investments are likely to increase by up to 8%, as operators raise more rigs and increase overall project sanctionings.
“In line with this, offshore development activity plans continue to strengthen, with subsea tree awards reaching their highest level since 2013 last year,” Kibsgaard said. “We are also seeing the start of a return to exploration activity on renewed interest in reserves replacement. Notably, new discoveries in 2018 were at the lowest level since 2000.”
During the first quarter, revenue declined 4% sequentially to $7.9 billion, reflecting the expected downturn in North American land activity after oil prices plummeted late last year in the heart of E&P budgeting season.
Schlumberger saw “softer pricing and lower activity for both our hydraulic fracturing- and drilling-related businesses, while revenue from our artificial lift product line was flat sequentially,” Kibsgaard said. U.S. Gulf of Mexico activity also fell slightly, with increased wireline activity unable to offset lower multi-client seismic license sales.
From a macro perspective, Schlumberger expects “the oil market sentiments to steadily improve over the course of 2019,” the CEO said, supported by a positive demand outlook in line with production cuts by the Organization of the Petroleum Exporting Countries and Russia taking full effect.
In addition, “slowing shale oil production growth in North America, and a further weakening of the international production base as the impact of four years of underinvestment becomes increasingly evident” should align with a better oil price outlook.
There are “clear signs” that E&P investments “are starting to normalize as the industry heads toward a more sustainable financial stewardship of the global resource base,” Kibsgaard said.
“Directionally, this means that higher investments in the international markets are required simply to keep production flat, while North America land is set for lower investments with a likely downward adjustment to the current production growth outlook.”
The “normalization” in global E&P spend, with a shift to international investments and a decline in North American land expenditures, “represents a positive market shift for Schlumberger,” Kibsgaard said.
“After enduring four years of major pricing concessions in support of our international customers, we see the recovery of international service and product pricing and improving our own financial returns as a major business priority.” Activity levels are increasing overseas, with “little to no spare equipment capacity” and more prudent capital deployment.
That said, Schlumberger’s 2019 business plan “is a clear commitment to generate sufficient cash flow to cover our business needs without increasing net debt,” said the CEO. Capital expenditures this year still are pegged at $1.5-1.7 billion, down from $2.2 billion in 2018.
Among the business highlights during the first three months, Schlumberger and Rockwell Automation jointly formed Sensia, a fully integrated digital oilfield automation solutions provider. Sensia is to operate as an independent entity, with Rockwell owning 53%.
In Mexico, Petroleos Mexicanos (Pemex) awarded Schlumberger’s WesternGeco a processing and reimaging project that will integrate more than 20 datasets acquired in the Campeche Basin in the southern Gulf of Mexico (GOM) over a 20-year period.
The surveys were conducted by several companies, including WesternGeco, and applied various technologies such as wide-azimuth, narrow-azimuth, and ocean-bottom cable. The project is designed to create an integrated earth model to help Pemex focus on deep targets and provide a better understanding of the complex subsalt reservoirs in the prolific Campeche Basin.
The award follows recent multi-client wide-azimuth and proprietary Q-Seabed multi-component seabed seismic system surveys that WesternGeco executed for Pemex.
Also in Mexico, Schlumberger and Royal Dutch Shell plc agreed to license a large WesternGeco dataset from the Campeche and Perdido areas; the Perdido extends into the U.S. deepwater GOM.
“To meet Shell’s timeline for its plans in offshore Mexico, WesternGeco will also perform advanced high-resolution reimaging on subsets of data in parallel with data processing to aid Shell in optimizing drilling locations,” Schlumberger noted. Last year, “Shell won nine of the 19 offshore Gulf of Mexico oil and gas blocks awarded in Mexico’s bid Round 2.4. Through this collaboration with WesternGeco, Shell says it is reinforcing its commitment to bring technology and rapid progress to its Mexico exploration program.”
On the technology front, Schlumberger signed a memorandum of understanding in January with Australia’s Woodside Ltd. “for early access to new digital technology solutions” to help the producer with cloud-enabled digital technology deployment and research/development innovation across all domains.
Schlumberger also highlighted several technology innovations deployed in the U.S. onshore.
In the Permian Basin, its PowerDrive Orbit rotary steerable system was used by Diamondback Energy Inc. to increase drilling efficiency. In one well, the rate of penetration (ROP) increased by 42% versus an offset well drilled from the same pad using conventional tools. “The customer established a new lateral length record of 13,319 feet, which was the most cost-efficient well drilled to date, and similar performance was delivered in the next two wells on the pad.”
In Oklahoma, Apache Corp. used Schlumberger’s EnduroBlade 360 rolling diamond element bit in the South Central Oklahoma Oil Province, i.e. SCOOP. The bit helped reduce drilling time in interbedded sections of sandstone, limestone and shale that cause severe drillbit wear, reducing the ROP. Apache reduced drilling time in the well by 66 hours from the “fastest offset well drilled from the same pad.”
Net income declined to $421 million (30 cents/share) in 1Q2019 from $525 million (38 cents) a year earlier. Cash flow fell to $326 million from $568 million.