Right-sizing the North America business helped Schlumberger Ltd. overcome an end-of-year slump in Lower 48 activity, while the international business continued to pick up steam.
Schlumberger (NYSE: SLB), a bellwether for the oil and gas industry, is the No. 1 oilfield services operator in the world. It managed to push through headwinds and delivered net income of $333 million (24 cents/share), compared with year-ago profits of $538 million (39 cents). Production margins were nearly flat sequentially, even with a 12% decline in revenue and a 19% fall off in North American land.
After warning of a decline in North American activity during a 3Q2019 conference call, the company answered in kind, CEO Olivier Le Peuch told analysts on Friday.
“We initiated our scale-to-fit strategy in North America land amid continued challenging market conditions, removed structural costs to protect margins, and accelerated technology access business models and asset-light operations transformation,” he said.
Revenue totaled $8.2 billion in 4Q2019, off 1% from a year ago and 4% sequentially. North America notably brought the overall bottom line lower, with revenue of $2.5 billion in the quarter, down 14% sequentially and 15% from a year ago on “customer budget exhaustion and cash flow constraints,” said the CEO.
Le Peuch pointed to “land market weakness” in North America, as exploration and production (E&P) customers “reached their budget limits earlier in the year and remained highly disciplined on capital spend.”
Production revenue was off 9% sequentially primarily because of a whopping 33% pullback in the North American pressure pumping business, OneStim, “as we continued to right-size our hydraulic fracturing capacity by stacking more fleets in the face of lower demand.
“This is part of the scale-to-fit strategy we are deploying in North America land, rationalizing our business portfolio to achieve improved returns and better profitability.”
More insight about North America is expected in the coming week, as Halliburton Co., the nation’s No. 1 pressure pumping company, delivers its quarterly results Tuesday, followed by Baker Hughes Co. on Wednesday.
Momentum in the international business propped up the quarter on revenue that was 8% higher year/year and 2% more sequentially at $5.7 billion. However, free cash generation was $2.7 billion for the entire year, similar to 2018 levels even on the North American market downturn, as international operations improved.
Operating margin increased 100 basis points in the second half 2019 from the first six months of the year.
For the year, net losses amounted to nearly $10.14 billion (minus $7.32/share), versus 2018 earnings of $2.14 billion ($1.53).
Last year “marked the beginning of a new chapter for Schlumberger,” Le Peuch said. “As we move forward, our vision is to define and drive high performance sustainably -- operationally and financially. Simply put, we want to be the performance partner of choice for the benefit of our customers and our industry.”
Latin America revenue climbed slightly by 1% from stronger WesternGeco multiclient seismic license sales in Mexico’s Bay of Campeche, partially offset by lower revenue in Argentina on reduced drilling and well services activity. Revenue in Ecuador declined slightly from production shut-ins caused by civil unrest at the beginning of the quarter. Cameron revenue also was higher on increased Surface Systems sales in the Mexico and Central America markets.
Le Peuch said he was “encouraged by the sustained international activity growth,” as conditions in North America land became more challenging.” The final three months were the first sequential growth in international margin since 4Q2014.
From a macro perspective, Schlumberger ended the year with “2020 oil demand growth sentiment turning positive as uncertainty reduced following the progress made toward a U.S.-China trade deal.” The first phase of the trade pact was signed on Thursday by President Trump.
“The fall in the North America production growth estimate of between 400,000 b/d to 800,000 b/d should continue to support the thesis for international investment,” Le Peuch said. “The recent escalation of geopolitical risk should set the floor for the oil price going forward.”
Production cuts announced by OPEC+, aka the Organization of the Petroleum Exporting Countries and its allies, should “limit investment and activity, particularly in the Middle East and Russia, during the first half of 2020,” Le Peuch said.
“As the year progresses, the effect of slowing North America production growth is likely to cause tightness in the market and further stimulate international operators to step up their investments in the second half of the year and beyond.”
Based on the forecast, “we expect 2020 E&P capex spending growth rate in the international markets to be in the mid-single-digit range...International revenue growth will be more heavily weighted to the second half of the year, with increasing offshore activity, improving activity mix from the early deepwater growth cycle, and increasing exploration work toward the end of the year and into 2021.”
In North America Schlumberger plans to continue scaling the business “by repurposing or exiting underperforming business units, focusing on asset-light operations, and expanding our technology access business models.”
While “cautiously optimistic that the high-grading of our portfolio will promote margin expansion and the improvement of returns in the North America land market, it has also led to the closing of a significant number of facilities and, unfortunately, workforce reductions.”
Among the technology highlights in the Lower 48 during 4Q2019, Schlumberger’s Bits & Drilling Tools segment collaborated with Matador Resources Co. to increase the drilling rate of penetration in the West Texas Wolfcamp A formation of the Permian Basin. Matador was able to “reduce drilling time in the two-mile lateral section by more than 50% compared with their average two-mile lateral section performance,” management noted.
Also during the quarter Chevron U.S.A. Inc. awarded OneSubsea a contract to supply an integrated subsea production and multiphase boosting system for the Anchor field in the Green Canyon Block of the Gulf of Mexico deepwater. The project is to be the first 20,000 pounds/square inch subsea production system in the industry.
In addition, Schlumberger said it is working jointly with ExxonMobil Corp. to deploy digital drilling solutions around planning, execution, and continuous improvement through learning. As a first step, ExxonMobil agreed to commercially deploy Schlumberger’s DrillPlan coherent well construction planning solution in its unconventional operations, which are concentrated in the Lower 48.
Schlumberger in December also became the first company in upstream E&P services to commit to setting a science-based target to reduce greenhouse gas emissions to align with the goals of the United Nations climate change accord.