Schlumberger 1Q16 Earnings Call Notes

Schlumberger NV (SLB) Paal Kibsgaard on Q1 2016 Results

The industry is displaying signs of a full scale cash crisis

“Activity fell sharply in the first quarter, as the industry displayed clear signs of facing a full-scale cash crisis. We experienced activity reductions worldwide, with the rate of disruption reaching unprecedented levels.”

2016 reductions are higher than expected

“The start of a new year and a new budget cycle represented a further fall in customer E&P spend, and we expect continued weakening in the second quarter given the magnitude and erratic nature of the ongoing activity disruptions. This outlook is backed by the latest 2016 E&P spending surveys, which indicate sharper falls than earlier figures. Global spending reductions in 2016 are now approaching 25%, corresponding to a fall of 40% to 50% in North America and around 20% in the international markets.”

Expect conditions to worsen further in 2Q

” we expect market conditions to worsen further in the second quarter, as customers continue to reduce activity. Excluding the additional revenue from Cameron, this market outlook together with our decision to reduce activity in Venezuela could lead to a sequential percentage fall in revenue for the second quarter, similar to what we saw in Q1. ”

View of oil markets remains unchanged though. Steady tightening of supply and demand balance

“Our overall view of the oil markets, however, remains unchanged, where a steady tightening of the supply and demand balance is taking place. The latest reports confirm that 2016 demand growth remains solid, while OPEC production levels have been largely flat since the mid of 2015. Production in North America continues to fall as decline rates are becoming more pronounced, while the mature non-OPEC production is now falling in a number of regions.”

Non-OPEC supply is now clearly in decline

“you look at non-OPEC production outside of North America, it is very clear that it’s now in full decline. If you look at non-OPEC production overall, it drops by 930,000 barrels over the course of Q1. ”

There need to be significant increases in E&P investment to meet growing demand

“I think we will need significant increases in E&P investment. There’s no way you can get around that. But if you look at the current state of the industry today and you look forward to 2017, there are limited sources of short-term supply that can be brought to the market.”

There’s still a lot of equipment capacity in NA that will keep oil service pricing down even when oil prices rebound

” I think when activity starts to increase, most of this equipment through some maintenance investment can be brought back in. And that’s why I still believe there’s a large capacity overhang in North America land. And with the current depressed service pricing, we need significant pricing increases to get back in to generate profits in North America land. And that’s why I don’t think that pricing traction is going to be significant in the short term, and that’s why also I think the earnings contributions from North America land is going to be a bit out in time.”

Have cut workforce by 42k people since the peak in 2014

“we reported at the end of Q4 95,000 people, and we reported 93,000 people at this stage, which indicates that we let go another 2,000 people during Q1. We actually released another 8,000 people during the first quarter. So we have now reduced our workforce by around 42,000 people from the peak in 2014.”

Cutting people in the field, but giving leave of absence to preserve operational expertise

” we are obviously right-sizing field capacity continuously. This capacity, we can build back relatively quickly, probably within 12 months. But even in the field capacity, we have introduced a program called intent of leave of absence. And here for our senior field engineers and for key operational people, we are giving them basically half an annual salary, paid 20% up front when they take this leave of absence, and 30% of the salary is paid when they return back after 12 months. And we have several batches of this incentivized leave of absence where we can call people back in the coming 12 to 18 months. So that’s a key part of how we preserve some of our core operational expertise.”

Combining hardware with sensors and software is the future for the industry

” I think the overall concept I think is widely accepted. This whole focus on total system innovation going forward, combining hardware with sensors, instrumentation, and software controls, this is the way of the future for the industry.”

Our industry is now in its deepest financial crisis on record

” our industry is now in the deepest financial crisis on record, with profitability and cash flow at unsustainable levels for most oil and gas operators. This has created an equally dramatic situation for the service industry. Each successive quarter for the past 18 months has brought increasing cost in E&P spend that have led to falling activity and lower demand for oilfield products and services. This is the toughest environment we have seen for 30 years, and it is likely to get even tougher before the market turns.”