Schlumberger 4Q16 Earnings Call Notes

Schlumberger’s (SLB) CEO Paal Kibsgaard on Q4 2016 Results

North America revenue up 4% sequentially

“In North America, overall revenue increased 4% sequentially driven by an improving land business in the US and Western Canada as drilling and completions activity increased and service pricing started to recover. In terms of technology, we saw the strongest growth on land in pressure pumping, followed by directional drilling, drill bits and drilling fluids as well as ESP, PCP and [rodless] product line.”

Moving into the recovery part of the cycle

“As we now move into the recovery part of the cycle, I would like to turn to the developing macro-environment and what this means for our business. First of all we maintain our constructive view of the oil market as supply and demand continued to tighten in the fourth quarter as demonstrated by the OECD oil stocks, which declined for the fourth month in a row in November. This tightening is partly driven by strong demand where the reporting agencies revised their global demand growth figures upwards in the fourth quarter, and now stand at around 1.5 million barrels per day in 2016 and between 1.3 and 1.6 million barrels per day in 2017.”

North America operators have plenty of access to funding, will lead the recovery

“As the up-cycle begins, growth in E&P investments will be led by the North America land operators who appear to remain unconstrained by years of negative free cash flow as external funding seems more readily available and the pursuit of shorter-term equity value takes precedence over a full cycle return. E&P spending surveys currently indicate that 2017 North America E&P investments will increase by around 30% led by the Permian basin, which should lead to both higher activity and a long overdue recovery in service industry pricing”

International recovery will be slower

” In the international markets, the recovery will start slower driven by the constraints of the international E&P industry where the various operator groups determine their investment levels based on full cycle returns and their available free cash flow. At current oil price levels this will result in the third successive year of lower Capex spend, which will further weaken the state of the international production base.”

Trends can only be positive in deep water

“Next, our international business is currently like a highly compressed coil spring. Activity levels in key market segments such as exploration and deep water are at record lows and although we do not expect a dramatic short term recovery the trends can only be positive from this point on”

2017 isi the start of a new multiyear cycle with pending supply shortage

“I think the key here is that we look at 2017 as a starting point of a new multiyear cycle, where the main challenge is actually going to be reverse the effect of several years of Global E&P underinvestment and then try to mitigate the pending supply shortage that we see unfolding. But the only way to achieve this is through broad-based increase in global E&P investments as North America and non-conventional production is not going to be able to address this pending supply issues by itself.”

Facing pricing is moving, but need more

“On the fracing side, yes pricing is moving now, we need significantly more pricing before we are getting into I would say a sustainable operating environment, but that trend has been kicked off, we are actively high grading our contract portfolio, and we have active pricing discussions I would say with all customers at this stage, so that process has started and will continue in the coming quarters.”

Scott Rowe

There was a substantial issue with deep water drilling costs even before the price of oil came down

Yes. I think everybody knows that there is massive cost inflation in Deepwater projects, all through, basically from 2009 through 2013, and the industry became incredibly challenged in 2013 and 2014, so even before oil price collapse there is a massive cost issue. And I think operators across the world and both small and large, you really started to attack this problem in late 2013. And what I’ve seen in our discussions with our customers is there has been substantial movement here. And so, obviously it starts with the drilling rigs and the drilling contractors. I think everybody knows the status there and the oversupply has driven costs down substantially.