Schlumberger Ltd.’s CEO said Thursday increased efficiencies are now the focus of onshore operators, hungry for technologies that reduce costs and improve production.
The technology guru, also the largest oilfield services provider on the planet, saw its North American first quarter revenue jump 12% year/year to $3.68 billion, despite severe winter weather impacts to land operations. CEO Paal Kibsgaard, who oversaw a conference call, attributed the robust results to higher service intensity, market share gains and a “new technology uptake in a pressure pumping market where pricing remained competitive.”
Schlumberger, like other onshore providers, has seen its U.S. and Canada business slump over the past two years due to excess capacity. With fewer rigs now pumping but more oil and gas being produced, explorers now are looking for efficiency in all stages of the drilling process. The company’s North American pressure pumping revenues, which support hydraulic fracturing (fracking), jumped 10% year/year.
“I think the overall activity in terms of new wells and in terms of frack stages is going to be up in 2014,” said Kibsgaard. “And whether we will add more capacity into this, I think is going to be a function of the pricing and the incremental margins we will get on the addition of fleets that we put in.
“All the fleets that we have introduced over the past three quarters, these criteria have been met, and that’s why we have been adding them…We are currently today operating at 82% in terms of 24-hour operations, which has been obviously a key driver for efficiency. Other than that, we are focusing in on term contracts” and “we have about 90% of our pressure pumping contract volume on term…a key element to help drive efficiency.”
Activity growth in North America this year is expected to be led by Texas targets, in particular the Permian Basin and the Eagle Ford Shale.
And everybody wants the latest and best technology, which is commanding “premium pricing…Our overall performance in this area was further supported by our engineering, manufacturing and sustaining organization that continues to deliver new and innovative products to our field operations, with strong out-of-box performance.”
Having term contracts and longer-term relationships “help us in the way we work together with them in terms of technical collaboration, as well as new technology introduction. I am reasonably optimistic about our ability to continue to gain share in that market,” said the CEO. Schlumberger expects base pricing for U.S. onshore services to flatten out this year.
Two pressure pumping fleets were added to U.S. operations in the first quarter, versus four in 3Q2013 and one in 4Q2013. The average 6% higher capital expenditure budgets this year announced by North American producers should be sufficient “to have a widespread price increase in commodity type of technologies,” said Kibsgaard. “Now you might have small pockets where there is a surge of activity and there is insufficient capacity to deliver. You might have situations where new technologies are introduced or where efficiencies are stepped up, where you can drive your effective pricing.
“But at this stage, I would say that we are expecting North America land pricing overall…to flatten from where it is now. That’s going to be the forecast I would say that we have going forward and then we are looking on top of that to drive up our effective pricing through a new technology introduction and by driving efficiency of our operations.
“U.S. natural gas demand reached a new all-time record in the first quarter, due to the severe winter weather pushing prices to a six-year high,” said Kibsgaard. “However, U.S. supply trends remain strong on the back of the Marcellus, and as the weather normalizes over the spring and summer months we expect the North American market to return to a balanced supply-demand situation from natural gas.”
North American land artificial lift markets hold a particular interest for Schlumberger, he said.
“There is clearly significant growth potential there. It’s a huge market. There are hundreds of thousands of wells that installed rod lifts, and we see a significant opportunity to apply more science and technology into this market and also to help drive production and cost per barrel. So, if you want to be part of transforming a market, which obviously is the ultimate goal this year, and transforming it to the benefit of our customers, we are firm believers that you have to play in it; you cannot change it from the side lines. So we have a growing…business in the North America land for the shale liquid wells.”
North America’s oil and natural gas supplies are “just enough to equal the world’s growing demand, while all other growth regions, including Iraq, Brazil and the Caspian, are struggling to meet their production targets. This should continue to support oil prices around $100/bbl, and therefore encourage oil-directed investments in both the North American and international markets.”
Quarterly profits rose to $1.59 billion ($1.21/share) from year-ago earnings of $1.26 billion (94 cents). Revenue from continuing operations climbed to $11.24 billion from $10.57 billion. North American revenues rose 1% from 4Q2013, but margins declined 106 basis points to 18.5% on pricing pressure and severe winter weather on land, as well as drilling delays in the Gulf of Mexico. North American revenues year/year grew 12%, while margins were down 53 basis points.
Analysts Byron Pope and Jeff Tillery of Tudor, Pickering, Holt & Co. said Schlumberger’s (SLB) quarterlies were “right down the fairway of expectations. “The market wants to be bullish North America right now and SLB’s results tilt in favor of that bet. International was slightly below expected and North America was ahead of our model (revised lower for the weather issues).” They had expected a 3% decline in revenues from the fourth quarter, but Schlumberger’s results were 1% higher in spite of weather issues and operational delays in the Gulf of Mexico.
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