Schlumberger 1Q15 Earnings Call Notes

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1/4 of the revenue decline was driven by currency

“Our first quarter revenue of $10.2 billion decreased 19% sequentially, while pretax operating margin decreased 255 basis points. Approximately 25% of the sequential revenue decline was attributable to the currency effect and the absence of the year-end increase in product, software and multi-client sales that we experienced last quarter. The remaining decrease was driven by activity and price declines.”

If you operate locally you’re hedged from currency fluctuation

“although our revenue was significantly impacted by the fall in value of many currencies, this phenomenon does not have a significant impact on our pretax operating income. This reflects the benefit of our local cost structure which largely serves as the natural hedge against currency movements on our bottom line.”

Collapse in land activity in North America

“Our first quarter revenue declined 19%, driven by the activity collapse on land in North America and the associated pricing pressure. International activity was lower, as customers cut budgets in response to lower commodity prices and was also impacted by the normal seasonal effects in the northern hemisphere and the fall of certain local currencies against the U.S. dollar.”

revenue declined less than rig count

“our North American revenue decreased 25% sequentially which was significantly lower than the 32% drop in land rig count. Operating margins in North America decreased 670 basis points sequentially, to 12.9%”

Held international margins flat despite 16% drop in revenue

“despite the severity of the sequential revenue decline and the unfavorable shift in revenue mix, we managed to minimize the impact on our pretax operating margins which was essentially flat with the previous quarter, at 24.1%.
This performance was achieved by strong execution, proactive cost and resource management and the acceleration of our transformation program.

Current financial challenges wont disappear even if prices rebound

“Looking at the industry as a whole, the current financial challenges will not disappear, even if oil prices were to recover to the levels seen in recent years. The industry is therefore forced to seek new ways of working together to reduce costs and create more project value. And we have seen a much closer collaboration between operators and large service companies, as a significant opportunity to create technical solutions that will achieve these objectives.”

North America may be down 30%

“Turning to the 2015 outlook, visibility still remains limited. However, we expect the largest open in E&P investments to occur in North America, where 2015 spend is expected to be down by more than 30%.”

US land drilling recovery will be pushed out for a long time and may peak at lower levels

“We further believe that a recovery in U.S. land drilling activity will be pushed out in time, as the inventory of uncompleted wells builds and as the refracturing market expands. We also anticipate that our recovery in North America land activity will fall well short of reaching previous levels, hence extending the period of weak pricing.”

International should fall less then NA

“In the international market, we expect 2015 E&P spend to fall around 15% which will create challenges in terms of both activity and pricing levels, but considerably less than the headwinds seen in North America.”

We don’t think the macro has changed at all. Demand remains strong, supply is impacted by a market share battle

“our view on the macro hasn’t really changed, compared to what we said both on the October and January call. First of all, the 2015 oil demand remains strong. And I was actually right [indiscernible] in the latest IA report. It would now be about 1.1 million barrels per day. While on the supply side, we continue to see the market share battle playing out globally.”

There have to be some big changes made in deepwater

“if you look at deepwater first, this represents a huge resource base for the industry. Now given the level of development cost today, as well as given the level of recovery factors we’re seeing today, the cost per barrel for these type of developments is challenged.
So there has to be a change in overall, in how these developments are done. We have to get the costs down and we also have to drive recovery up.

We’re going to have to live with these cuts for a while

“given the cash flow constraints, we don’t expect that rig counts are going to come back to the previous levels of around 2000. It’s going to come back to somewhere in between the current levels and where it was.
And for the service industry, that means that the pricing concessions that are currently being given, we unfortunately are going to have to live with for a while, because there’s going to be a pretty significant order capacity for all sorts of services, given the lower activity level that we’re going to recover to.

Revenue should continue to come down in 2Q

“t this stage, we see both North America and international revenue coming down further in Q2 [indiscernible]. But I would say more so in North America than in international.”

Revenue reductions are slowing, but not ready to say it’s the bottom yet

“I would say that the revenue reductions in Q2 are slowing in pace. I’m not ready to say that it’s the bottom yet.”

Probably some increase in Brent prices coming, but question is will OPEC try to defend below $100

“given the reductions we’re seeing in spend and the weakness in several of the key basins, we expect that weakness to continue and potentially increase, as the year progresses and I think that’s why we believe that there will be some recovery in Brent. The question is, to what extent OPEC wants or is willing, to put more barrels on the market to stabilize prices at some level below $100.”