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Schlumberger Forecasting 2Q as ‘Most Uncertain and Disruptive’ Period Ever Seen by Energy Industry
The duration of the global Covid-19 pandemic remains uncertain, but the oil and gas industry likely will face the “most severe” impacts in the second quarter, Schlumberger Ltd. CEO Olivier Le Peuch said Friday.
He shared first quarter results and a partial outlook for the current quarter during a conference call with CFO Stephane Biguet in Houston.
Even with the recent agreement by the Organization of the Petroleum Exporting Countries and its allies, aka OPEC-plus, “the second quarter is likely to be the most uncertain and disruptive quarter that the industry has ever seen,” Le Peuch said.
The CEO deferred from offering guidance, “as we face a degree of uncertainty beyond the severe impact of oil demand contraction and delivery of commodity prices. First, it is very difficult to model or predict the frequency of magnitude of the Covid-19 on field operations.
“Second, it is too early to judge the impact of recent OPEC-plus decision on the level of international activity as well” because oil storage levels are nearing capacity.
For the largest operations, which are in North America, Schlumberger is anticipating onshore exploration and production (E&P) activity “to continue to decline sharply during the second quarter,” off by 40-60%, “which match the full-year budget adjustment guidance” shared by most customers.
North American land operations during 2Q2020 are likely to see “the most severe decline in drilling and completion activity in a single quarter in several decades” based on capital expenditure (capex) cuts announced by E&Ps to date.
[Want to see more earnings? See the full list of NGI’s 1Q2020 earnings season coverage.]
“At this time, customer feedback and our analysis indicate global capex spend is expected to decline by about 20% in 2020, with the largest share of the reduction affecting North America, which is estimated to drop by about 40%,” Le Peuch said. “In contrast, international E&P capex is expected to decline by about 15%.”
The independents are cutting capex faster than the international oil companies, while national oil companies “have reduced the least to this point but might adjust following the recent OPEC-plus agreement.”
Final investment decisions “are expected to fall back to trough levels of 2015, which would indicate project delays to 2021 and beyond.”
It became clear what direction business was headed going into March as “activity started to decline in several basins,” Le Peuch said. The most “serious impact was in North American land,” where 17% of the workforce was laid off through March, or by around 1,500 people.
In addition, furloughs have been implemented “across many parts of organization in North America and internationally,” with compensation reduced for executives and the board.
It is “difficult to judge the magnitude” of how many wells may be shut-in across the Lower 48. “It would depend on how fast and how much there will be an excess of supply going into topping the storage tanks. I think it depends on the reservoir. It depends on the location.”
North American hydraulic fracturing (frack) fleets already are adjusting “to fit the market,” Le Peuch said. As “all prices began to collapse in March, customers rapidly dropped rigs and frack crews…Along with well construction and completion activity decreasing, the technology mix switched from the adding performance to saving costs…
“We have acted rapidly by stacking frack fleets leads to protect our margin and have reduced capacity by more than 27%.” By the end of March, North American capex had been reduced by 60% from original guidance.
“The pace and scale of decline is still uncertain,” the CEO said, but it is likely to be “more abrupt than any recent downturn.”
At least 100 frack fleets for the full industry are forecast to be maintained in the U.S. onshore. Le Peuch dismissed suggestions by some analysts who have pegged the decline to as low as 50.
“We don’t believe this would be the case,” he said, At least, that’s what we see and the indications we have…” Schlumberger is planning to maintain around 10-15 fleets “as a minimum approach…” Some fleets have to remain active for the strategy in various basins, and “customers have cognizance in the performance we bring.”
The OFS giant has its finger in every onshore and offshore exploration and development area on the planet, but management is unsure what’s ahead in the final six months of 2020. The dividend has been cut by 75% to 12.5 cents from 50 cents.
Capital investments have been trimmed across all business lines, and including capex are set at $1.8 billion for 2020, 30%-plus lower than 2019. Capex is expected to be around $1.2 billion, versus $1.7 billion in 2019.
“The enormity of the task ahead will require levels of response and depths of resilience that have yet to be fully realized,” Le Peuch said. “Our immediate actions have been focused on those things we can control in protecting our business in an uncertain industry and global environment…
“The future of our industry poses difficult challenges — for people and for the environment — but in challenge lies opportunity. Backed by the resilience and performance of our people, technology leadership, and financial strength, we believe we are well-placed to succeed as the industry recovers from this unprecedented downturn.”
Employees are coping with the pandemic as expected, Le Peuch said.
“We kept very close to our customer as the crisis developed, and we were able to maintain site operations with only minimal disruption across a few countries.” Even with the “difficulty of the situation in the U.S., which our people have been working through, it was one of the best quarters in terms of service quality and actually the best quarter ever in safety performance.”
Remote operations have been accelerated, and about 60% of the drilling operations have been automated to reduce the footprint of people on a rig site. That’s expected to continue.
First quarter revenue reached $7.5 billion in 1Q2020, down 9% sequentially and 5% year/year, sparked by the pandemic and the oil price war, which increasingly impacted the energy industry.
“This double black swan event created simultaneous shocks in oil supply and demand resulting in the most challenging environment for the industry in many decades,” Le Peuch said.
North American revenue fell 7% sequentially to $2.3 billion, while international revenue was off 10% at $5.1 billion.
Net losses totaled $7.4 billion (minus $5.32/share) in 1Q2020, versus profits of $430 million (30 cents) a year earlier.
Losses in the first three months of 2020 stemmed from one-time asset impairments totaling $8.5 billion, which included a $587 million hit in the North America pressure pumping unit. Excluding the charges, the company earned 25 cents/share.
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