Schlumberger 1Q14 Earnings Call Notes

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A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Severe winter weather in China and Russia too

“In spite of severe winter weather impacting activity in our Russia, China, and North America land operations, our first quarter results were solid and fully in line with our expectations.”

Brazil a headwind to Latin America results

“year over year reduction in revenue was predominantly driven by Brazil, where both activity and pricing were significantly down compared to last year”

Shale work in Argentina

“In Argentina, year-over-year growth was strong driven by rig-based activity in the Vaca Muerta shale where we are also actively engaging with a number of customers on sub-surface studies and on projects to improve drilling and completion efficiency.”

Oil markets tight

“the oil markets have been significantly tighter than anticipated, as strong demand trends in OECD and in the Middle East together with continuing supply disruptions in various regions have left to lower spare capacity figures and pushed OECD stocks down to the largest deviation from historical averages since 2003.”

North American production growth just barely enough to meet global demand growth

“The North American supply search continues to be 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 a barrel and therefore encourage oil directed investments in both the North American and International markets.”

Natural gas prices will come back down

“U.S. supply trends remain strong on the back of the Marcellus and as the weather normalizes over the springs and summer months we expect the North American market to return to a balanced supply demand situation from natural gas.”

International gas is a tight market though

“International gas markets remain relatively tight largely driven by Chinese demand which continues to grow at double digit rates while European gas demand has eased in the past months on a mild winter.”

Things aren’t lining up for the production bull case, just as is usual

“if you want to build a very kind of bullish case on production, I am sure you can do that. It’s just that if you go back and look at the previous years, there is always an element of project delays and production disruption. And what we said in January is that we expect there to be a normal dose of that in 2014. And so far this year we have seen that, so the market is still relatively tight. Obviously these stocks are down. OpEx spare capacity is down. And there is nothing dramatic in it other than that all the things aren’t lining up as maybe the bull case was at the beginning of the year for production.”

IOCs going to be focused on generating cash for the next couple of years, low infrastructure investment

“I think what’s going to happen at least over the next couple of years is that the IOCs will focus more of their spend where they can drill wells and generate production from existing infrastructure or from infrastructure that costs less. So huge infrastructure projects, I would expect to be kind of lower in frequency. And some of them might be postponed as we have already seen. While the focus, again is going to be on generating production which generates cash. So the ability to do that at the lowest possible investment, I think is going to be the focus, which is still good for us.”

Brazil creating headwind for whole deepwater market

“if you look at the deepwater market, it’s really two separate stories, you have Brazil and you have the rest of the world. In 2013, Brazil represented around 30% of the global deepwater drilling activity and in Q1 of 2014 Brazil was 20% down in activity while the rest of the world was up 3%. Now for the full year of 2014, we expect Brazil to be down more than 20% versus last year, while the rest of the world we see as being up high single digits. And as we previously indicated in January, the growth in the rest of the world deepwater is going to be driven by sub-Sahara Africa and Gulf of Mexico, so really no change to that.”

E&P companies taking advantage of environment to get relief on pricing pressure

“if you look at what’s happened on deepwater day rates over the past three, four, five years they have increased significantly and they have been completed disconnected from the other deepwater oilfield services, right. So today the rig rental makes up around 50% of the deepwater well cost, so customers have really been looking for the opportunity to get the rig rental rates down and the opportunity is here in form of the high number of new arrivals, all contract expiring and a significant reduction activity in Brazil. So I think this is the opportunity. In the short term they are trying to get some relief on cost.”

6% Capex growth not enough to create pricing pressure in North America for commodity services

“I don’t think 6% is going to be sufficient to have a wide spread price increase in commodity type of technologies. 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, we are hoping it’s going 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.”

Opportunity for technological advancement in artificial lift

“we are interested in North America land artificial lift markets, and we have followed it for some time. 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 markets and also to help drive production and cost per barrel.”

If you want to transform a market, you can’t do it from the sidelines

“if you want to be part of transforming a market which obviously are 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.”