Schlumberger 2Q16 Earnings Call Notes

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Schlumberger NV (SLB) Paal Kibsgaard on Q2 2016 Results

We have now reached the bottom of the cycle

“. In the second quarter, market condition worsened further in most parts of our global operations. But in spite of the continuing operational and commercial headwinds, we have now reached the bottom of the cycle.”

The cost of production per barrel has fallen significantly but there has been no major step change in underlying drivers of cost

“The operators have reacted to this crisis by initiating a massive reduction in oilfield activity and by sending unsustainable pricing shock throughout the entire oil industry supply chain. In addition, there is currently also a widespread high-grading of activity taking place in the industry aimed at maximizing short-term production and cash flow. Adding up all of this, the current cost per barrel for the oil producers now appears to be significantly lower than what was the case seven quarters ago. However, this should not be confused with a permanent improvement in the underlying industry performance as there has been little to no fundamental change in technology, quality or efficiency, no major step change in industry collaboration and no general transformation of the industry business model.”

The decline in cost has been a redistribution of profit away from servicers

“What has taken place over the past 21 months is, instead, a redistribution of the profit and cash flow shortfall from previously sitting mostly with the oil producers to now representing an unsustainable burden for the supplier industry even after a massive reduction of costs and capacity.”

We are heading toward significant global supply deficit

” assuming that we continue to see a steady growth in demand, we are heading towards a significant global supply deficit as the E&P spend rate now is down by more than 50%”

The market is underestimating the pricing power of servicers, which will further depress supply growth

“In addition, the market is also underestimating the potential reaction from the supplier industry, which has temporarily accepted financially unviable contracts to support the operators and to keep their options open as the downturn has deepened and extended into uncharted territory. This is seen by the service industry profit levels and also from their ballooning receivables balances caused by operators who are unable or unwilling to provide timely payments. It also means that, inevitably, service industry pricing has to recover and as it does, this will consume a large part of the E&P investment increases intended for additional activity which will further amplify the pending oil supply deficit.”

We have reached a bottom but the pickup will be slow and steady

“Well, that’s quite a broad question, Jim, but I would say that we are clear that we have reached the bottom of activity in North America land, and that activity will increase not in a V shape dramatic fashion but I think there will be a steady increase in rig counts and associated frac activity, both from the rigs as from wells coming out of the DUC inventory. Now again, I think the activity will be more slow and steady”