Schlumberger Ltd., the No. 1 oilfield services operator, kicked off third quarter earnings season Friday, working to demonstrate its wherewithal to retrench and streamline, but CEO Olivier Le Peuch also pulled no punches in warning that the coronavirus remains a threat to the energy industry.
During a wide ranging conference call from Houston, the CEO promoted Schlumberger’s “disciplined” makeover as Covid-19 began to sap energy demand and customer activity last spring. The oil and gas business faltered, but Schlumberger shored up the operations and expanded its digital offerings. Still, the pandemic’s lingering effects offer no clear path forward, he said.
“Overall internationally, we view the next two quarters as a period of transition for our industry at the trough of this cycle,” he said. “Improving demand recovery supported by various government measures to stimulate economic activity and continued supply discipline from the major producers set the conditions for a long-term activity rebound.
“However, while the global lockdowns are evolving and vaccine development is progressing, the near-term recovery remains fragile owing to potential subsequent waves of Covid-19 that could pose a significant risk to this outlook.”
‘Fragile’ Economic Recovery
Market uncertainties persist, he said, “as the economic recovery remains fragile. The pace of recovery could possibly be at a slower pace as a result of a second wave of pandemic outbreaks…”
Schlumberger also faces the “risk of lingering Covid-19 operational disruption internationally into the winter season. In this context, we will continue to focus on what we can control and promptly, if necessary.”
Exploration and production customer activity to the end of the year is forecast to be flat, with a “continuation of modest activity in North America and the stabilization toward steady activity internationally.”
Conditions “still exist to rebalance” oil and gas oversupply during 2021, “supported by economic stimulus measures and continued supply discipline from the major producers…North American land is expected to continue to see a subdued recovery” as most operators are “currently evaluating their options to restore activity.”
As the oil and gas industry “emerges from this trough, the ability to deliver new performance benchmarks — to innovate and collaborate in every basin — will define success for the coming decades,” the CEO said. “In addition, we are accelerating the expansion of our New Energy portfolio as we develop avenues to contribute to the sustainable energy mix of the future, leveraging our technology, expertise, and execution platform to reduce our environmental impacts while helping our customers reach their environmental goals.
The coronavirus “crisis has served as a catalyst for reinventing Schlumberger. We are executing our performance strategy and are determined to continue taking bold actions to secure resilience and reposition ourselves as clear leaders — both in performance measured by our customers and in returns measured by our shareholders.”
Schlumberger has reduced its workforce, divested assets and partnered in pivotal ventures, “and we are on track to realize most of our payments on structural cost savings as we exit this year,” Le Peuch told investors. The cost reduction program remains on track to remove most of the $1.5 billion of structural costs by the end of this year.
“We also began to transition to a leaner customer structure comprised of divisions and basins designed to support the specific innovation…to position us as the performance partner of choice in North America.”
The company began “high grading and rationalizing” the North American portfolio to focus “on reduced volatility of earnings and less capital-intensive businesses,” Le Peuch said.
To improve its North American cost structure, Schlumberger clinched one deal giving Liberty Oilfield Services Inc. control over OneStim, the massive Lower 48 and Canada completions business. In exchange, it secured a 37% stake in the Denver-based operator. OneStim provides pressure pumping, pump down perforating and Permian Basin sand.
The North American footprint is to be smaller as Schlumberger sees a brighter future overseas, said the CEO.
With the North American transactions, “we expect our international revenue to represent more than 80% of consolidated revenue, up from an average of approximately 65% over the past decade,” Le Peuch said. “The combination of our fit-for-basin strategy, digital technology innovation, and scale puts us in the best position to leverage the anticipated shift of spending growth toward the international market.”
Meanwhile, Schlumberger also collaborated in the quarter with IBM and Red Hat to build out digital transformation across the energy industry by contributing its estimable technology for reservoir characterization, drilling, production and processing. The data could give exploration and production companies more precise information to create better wells and safer operations.
In parallel, the company is developing “avenues to contribute to the decarbonization of oil and gas operations, leveraging our technology expertise and execution platform,” Le Peuch said.
During the final three months of 2020, “we expect to continue to benefit from the effectiveness of our strategy, disciplined approach to North America, and broad strength of our international business, as reflected in our third-quarter results.
“In North America, the conditions are set for continued momentum, with improving DUC well completion activity in U.S. land and a modest drilling resumption in the U.S. and Canada. International activity is steady following the budget resets completed in the third quarter and activity will be affected by the seasonal decline in the Northern Hemisphere, partly offset by muted year-end product and multi client license sales.”
Net losses totaled $82 million (minus 6 cents/share) in 3Q2020, versus year-ago losses of $11.3 billion (minus $8.22). Revenue fell 38% year/year to $5.3 billion. Cash flow from operations was $479 million, while free cash flow came in at $226 million, even after making an estimated $273 million in severance payments.
North American revenue fell 2% sequentially to $1.2 billion. In North American land, increased completions activity on drilled but uncompleted wells, i.e. DUCs, was offset by reduced drilling in the Lower 48. North America offshore was affected by reduced rig activity, lower multi client seismic license sales and hurricane disruptions from an especially active season.
OneStim fracturing revenue “grew on higher fleet utilization driven by a U.S.-market stage count increase of more than 30%, as customers worked on their DUCs in the Permian Basin and in the resilient gas basins in the Haynesville,” Le Peuch said.
“Land drilling activity was lower as the average U.S. land rig count declined 29% sequentially, though the rig count had increased slightly by quarter end. In addition, sales in Surface Systems and Valves & Process Systems, mainly on land, decreased sequentially due to reduced drilling activity. North America offshore revenue decreased 13% sequentially due to the combination of reduced rig count, lower WesternGeco multiclient seismic license sales and hurricane disruption.
International revenue in 3Q2020 was driven by higher activity in Latin America, boosted by the resumption of production in the Asset Performance Solutions projects in Ecuador and increased seasonal summer activity in the North Sea and Russia.
By segment, Reservoir Characterization revenue fell 39% year/year and 4% sequentially to $1.0 billion. In the Drilling segment, revenue slumped 38% from a year ago and off 12% from 2Q2020 at $1.5 billion. The Production segment recorded a 43% revenue decline from a year ago, but it was 12% higher sequentially, at $1.8 billion.
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