Schlumberger 2Q15 Earnings Call Notes

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Dramatic reduction in US land activity has created massive oversupply

“In U.S., land activity was down in all basins in the second quarter with the rig count dropping below 860 for most of the month of June. In addition to the significant reduction in rig count, poor weather conditions with floods in Texas, Arkansas and Alaska also drove activity lower in the second quarter. The dramatic reduction in activity in U.S. land has created a massive capacity oversupply in the service industry with pricing quickly plummeting to unsustainable levels in particular for pressure pumping where many companies now are desperately fighting to survive.’

OPEC continues to produce at high levels in a battle for market share

“Turning now to the overall outlook for the second half of the year, visibility still remains limited. However, some tentative signs of change are emerging. On the supply side of the oil markets, the global market share battle between OPEC and the high-cost producers is still playing out, with the first signs of flattening North America production starting to show. Within OPEC, production in the second quarter was at the highest level for three years, as marketed supply was again increased at the expense of lower core spare capacity, which, in June, dropped to 2.3 million barrels per day.

Demand growth continues to strengthen

” global oil demand growth continues to strengthen, with the IEA having revised its 2015 estimate up to 1.4 million barrels per day during the second quarter. These factors all points to a potential tightening in the global supply demand balance in the coming quarters.’

2015 E&P spend expected to be down 35%

“the largest drop in E&P investments is, as expected, occurring in North America, where 2015 spend will now largely be down by more than 35%, driven by both pricing and activity on land.”

We’ve probably seen the bottom for rig count, but we will only see a slow increase in drilling activity in the second half of the year.

“We do believe that the North American rig count has now reached bottom, but that we will only see a slow increase in drilling and completion activity in the second half of the year, which will not make any material dent in the massive overcapacity that has been created. This again means that there will be little to no improvement in pricing levels and, hence, the market will still remain very challenging for the foreseeable future.”

We are still confident that markets will tighten in the second half of the year

“I think the tightening that we’ve been foreshadowing, we are still relatively confident that that will happen in the second half of the year.’

Deepwater projects are long term projects and committed so likely not an impact at this stage

“In terms of the deepwater projects, I think, yes, there are some projects that are being delayed and some projects being canceled, if possible, but I think in general, these are long-term investments, many of them are already deeply committed. So we don’t see any kind of dramatic impact at this stage on the projects that are in the pipeline. Now, going forward, in terms of sanctioning new projects, I think it’s going to be very important for the industry to be able to – the service industry together with our customers to be able to come up with technical solutions and field development plans that significantly reduces cost per barrel.”

These were pretty clean results

“we have a clean quarter this quarter. There are no charges in it, so this is basically straight-line business performance in the second quarter.’

[Analyst comment] shows that most people are still thinking oil prices should be higher. Asks for 2016 outlook assuming $65 brent

“regarding the international outlook for 2016, which is, obviously, very preliminary, but based on your recent conversations and thinking through your viewpoints on supply/demand for crude, if we are in a $65 Brent world, what would your preliminary thoughts”

If markets tighten and oil price rises, good chance that E&P spending is up next year slightly

“if we see some improvement in the oil price in the second half of this year, I don’t think there is going to be any huge impact on the current year budget, but I think it’s a positive indicator that we might have some increase next year. I don’t think the increase in 2016 is going to be large, but I think there is a good chance that E&P investment levels next year will be higher than what we’ve seen in 2015.”

We are out of Iran. If the sanctions are lifted we will consider going back in

“Our position and our view on Iran is the following: we have fully exited Iran. When the sanctions are lifted and when it is permissible, we will evaluate going back in. So beyond that, I don’t really have anything more to say about what we will do, but it’s coming down to, firstly, that the sanction needs to be officially lifted, which they are not yet done.”

We were decisive about dealing with this downturn

“I think, we are pleased with how we’ve handled the downturn so far. We decided to be rather decisive in rightsizing the workforce for the downturn we are facing, and that includes both rightsizing and streamlining the support structure as well as the field capacity.”

We think we are pretty close to a bottom

“yes, you can infer that we are looking and searching for the uptick and that we think that we are pretty close to bottom.”