North America onshore operations are set to surge this year for Schlumberger Ltd., as it readies more horsepower and expands capacity for sold-out rotary steerables and drillbit technologies, CEO Paal Kibsgaard said Friday.
The No. 1 global oilfield services operator often sets the tone for earnings season. Schlumberger, whose global operations are in part headquartered in Houston, did not fail to disappoint. Management offered an upbeat forecast not only for North America but for international operations as well. However, the business mix is evolving, as the company prepares to exit its long-standing seismic acquisition business.
“After three very tough years, it is now clear that the tide is clearly turning in favor of Schlumberger,” Kibsgaard said during a quarterly conference call. “We expect 2018 to be another year of strong growth in North America land, driven by further market share gains in both hydraulic fracturing and drilling as we deploy another 1 million hp…”
The CEO credited oil supply concessions by the Organization of the Petroleum Exporting Countries and its allies through 2018 as helping to balance global supply.
“All of this means that after a full year of waiting, the oil market is now substantially rebalanced. This is also reflected in the oil market sentiment, but we currently are witnessing a gradual shift from an oversupply discount toward the restoration of a market tightness premium, with any geopolitical or operational disruption creating further upward movement in the oil price…
“Looking forward to 2018, some of the U.S. E&Ps are still indicating that they will invest within cash flow in coming year,” Kibsgaard noted. “However, with a positive oil market sentiments and the increased availability of cash, we expect another year of robust growth in North America shale oil production, which will be required to maintain the balance in the global oil market.”
The “aging” production base in Latin America, Africa and Asia “continues to show underlying production decline after three years of unprecedented underinvestment,” said the CEO. Beyond this year, when several large oil supply projects are scheduled to come online, a decline in oil production growth is expected in 2019 “and beyond, even if investment levels start increasing in 2018.”
North American Land Revenue Rising
The gains in pricing played out as expected in 4Q2017, with North American exploration and production (E&P) companies ramping up drilling and completion activity. Executive Vice President Patrick Schorn of New Ventures provided a geographic overview of operational activity during the fourth quarter.
“Looking at North America, revenue grew 8% sequentially, driven by a further increase in land activity as well as improved pricing,” Schorn said. The gains came despite a 1% decrease in the fracture market stage count.
The fracturing operations benefited from a full quarter of activity for the fleets activated in the third quarter, as well as additional fleets redeployments in the final three months of the year.
At the end of December, Schlumberger scuttled a planned joint venture with Weatherford International plc to combine their onshore horsepower fleets through OneStim and instead bought out Weatherford’s 1 million hydraulic hp.
“The progress of the OneStim business over the past year is married by the success of new contract awards,” Schorn said.
For example, OneStim secured a memorandum of understanding with Occidental Petroleum Corp. for a five-year service partnership within the Delaware sub-basin of New Mexico’s Permian Basin. “Our joint objective is to reduce the cost per barrel in the safest and most efficient way possible.” Pending final contract negotiation, the agreement includes a minimum scope of 700 wells and constructing a Schlumberger facility on the producer’s acreage.
In Louisiana, OneStim operations used by Aethon Energy achieved top quartile production in one well after stimulating a four-well pad in the Haynesville Shale. The BroadBand Sequence service injected pills to promote diversion and stimulate all perforation clusters, while pressure analysis verified stimulation throughout the perforated interval.
The fracturing service was used for Encana Corp. to refracture wells. In the Eagle Ford, oil production rose in one well to 650 b/d from 50 b/d, with flowing pressure increased to 5,000 psi from 250. And in the Haynesville, the service helped increase Encana’s natural gas production in one well to 5,000 MMcf/d from 100 MMcf/d, with flowing pressure increasing to 6,000 psi from 1,500 psi.
Seismic Acquisitions Exit
Schlumberger plans to tackle 2018 activity without bumping up capital expenditures from the $2 billion level in 2016 and 2017. Investments this year will be trained “on monetizing the strong library we have already bid,” Kibsgaard said.
In addition, changes are planned in the historical business mix. During the fourth quarter, Schlumberger took a $3 billion one-time impairment after making a decision to exit the seismic acquisition business, long considered an integral part of global operations.
“Given our history and market position, this has not been an easy decision to make,” Kibsgaard said. “But following a careful evaluation of the current market trends, our customers buying habits, and other current and projected financial returns, it is unfortunately an inevitable outcome.”
Geophysical measurements and seismic operations have been part of Schlumberger and its research/development efforts for more than three decades, he noted. However, the downturn in the seismic data acquisition business is entering its sixth year, and “the present outlook provides no line of sight to a market recovery.
“It has also become clear to us that our customers are unwilling to pay a premium for our differentiated seismic measurement and surveys, and they clearly believe that generic technology and performance is sufficient.” That belief has provided a “ very low technical barrier to entry for smaller players, who steadily adds vessels and keep the market in a chronic state of overcapacity.”
The “challenging commercial environment is today clearly reflected in the financial statements of all the standalone seismic acquisition players, who are either at/or close to bankruptcy, heavily burned by weak cash flow and high debt,” Kibsgaard said. “And while standalone seismic acquisition players have no other choice than to stay in and fight on to avoid bankruptcy while hoping for a better future, we, at Schlumberger, do have a choice, and we choose to exit the commoditized land and marine acquisition business.”
The decision to exit the seismic acquisition market took a big bite out of 4Q2017, with charges leading to a loss of nearly $2.26 billion net (minus $1.63/share) from a year-ago net loss of $204 million. During 3Q2017, Schlumberger recorded a net profit of $545 million.
Of the $3 billion of pre-tax one-time charges in 4Q2017, $2.01/share was written down for impairments and restructuring, 5-cent charge was added for related merger and integration costs, and another 5-cent charge related to the recent U.S. tax reform legislation.
Excluding the one-time charges, net earnings in 4Q2017 totaled $668 million (48 cents/share, compared with year-ago profits of $379 million (27 cents) and third quarter earnings of $581 million (42 cents).
Operating cash flow in the final period was solid at $2.3 billion, with revenue up 3% sequentially to $8.2 billion. Pretax operating income jumped 9%, with operating margins increasing 99 basis
points to 10.2%.
In North America, land revenue grew 6% in 4Q2017 year/year. Pretax operating margin of 10% increased 39 basis points (bps) sequentially on improved pricing on land in North America. Incremental margin in North America land was 23%, expanding pretax operating margin by almost 100 bps during the quarter.
© 2020 Natural Gas Intelligence. All rights reserved.
ISSN © 2577-9877 | ISSN © 1532-1266 | ISSN © 2158-8023 |