Schlumberger 3Q15 Earnings Call Notes

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Effective tax rate just 20%

“The effective tax rate was 20% in the third quarter.”

Fears of reduced growth in China and additional Iranian exports are offsetting tightening supply/demand picture

“as we enter the last quarter of the year, the global oil market is still weighed down by fears of reduced growth in China, and the timing and magnitude of additional Iranian exports. However, the fundamental balance of supply and demand continues to tighten driven by both solid global GDP growth and by weakening supply as dramatic cuts in E&P investments start to take full effect. We expect this trend to continue and as the oil markets further recognizes the magnitude of the industry’s annual production replacement challenge, this will gradually translate into improvements in oil prices going forward.”

Outlook for oilfield services companies will still be challenging despite expected improvement in oil prices

‘Second, in spite of the expected improvements in oil prices, the market outlook for oilfield services looks challenging for the coming quarters, as we expect additional reductions in activity and further pressure on service pricing.”

A year of very low prices has exhausted available cash flow

“This is driven by the financial pressure on many of our customers where a year of very low oil prices is now exhausting available cash flow and corresponding capital spending and also leading them to take a very conservative view on 2016 E&P budgets.”

Expect E&P investments to fall for 2nd consecutive year

“Based on this industry outlook, we expect E&P investments to fall for a second successive year in 2016, which is the first time since the 1986 downturn, when the spare capacity cushion was more than 10 million barrels per day.”

Recovery in our activity levels now seems to be a 2017 event

“while our macro view has not changed in terms of a tightening supply and demand balance and an expected improvement in oil prices, we have to factor in that the likely recovery in our activity levels now seems to be a 2017 event.”

We have decided to proceed with a further round of overhead reductions

“We communicated in our previous earnings call that we were prepared to live with our existing cost base going forward, provided we were close to the bottom of the market and that the activity recovery was only a couple of quarters out…The likely timing gap between the oil price recovery and the subsequent increase in oilfield services activity in combination with a more conservative spending outlook from our customers is causing us to now take further action. We have therefore decided to proceed with a further round of capacity and overhead reductions, which will result in a restructuring charge in the fourth quarter.”

Starting to see weakening of international supply as well

“In North America, the production is coming down more or less as expected as well and internationally, we are starting to see signs of a weakening supply as well.”

Hopefully 1Q16 is the bottom but it’s too early to say, we can see that Q1 should be below Q4

“we hope that Q1 will represent the bottom and there would be a gradually, but slow recovery during the year or even sideways. I think it is still too early to say, James. I think we have, even for Q4 now there is significant uncertainties in several of the markets on what’s going to happen. Beyond that we clearly see Q1 being below Q4, but visibility, Q1 is still very low.”

I think the oil price is now likely to start to move upward

“I would say also that there is a limit to how long these reductions in investment and activity can continue. And I think as the oil price now likely will start to move upwards, hopefully investments will turnaround, but anything meaningful will be late ‘16 and into ’17 as we see it as per today.”

Customers haven’t completed budgeting yet, but feedback is consistent that ’16 will be lower

“Most of our customers haven’t completed or just barely started our budgeting process for 2016. But the general feedback is very consistent. And that is, they expect, the vast of them that spend will be lower. ”

After 4 quarters of weak prices, financial strength has significantly weakened

“I think the fact that now four quarters into very low oil prices, the financial strength of many of our customers has significantly weakened and their appetite to invest is also a bit down. Any I think – any improvement in oil prices, I think will be to initially – is going to go towards the strength in the balance sheet and then the oil companies will likely assess how sustainable are these increases in oil prices before they start investing.”

Capex cuts will probably not be in the 20-30% range next year

“I think, full year 2016 – for full year 2016, that sounds like a high number. At this stage, I don’t think it’s going to be as much as that, no.’