Schlumberger 2Q17 Earnings Call Notes

Paul Kibsgaard

Sustained demand growth provides foundation

“let’s turn to the oil market where a sustained growth and demand continues to provide a much needed foundation for the outlook leaving little reason for concern over this part of the oil market equation.”

Third year of global under investment

“The supply side however is far more complex with market nervousness and investors speculation generally overshadowing facts and physical fundamentals leading to unpredictable movement in oil prices inspite of a third year of global under investment”

OPEC countries are acting to support prices

“The OPEC Gulf countries and Russia which combine make or close to 40% of global oil production remain fully committed to sound and consistent stewardship of their resource base. This is reflected in a steady increase in oil selectivity over the past three years as the world’s best well at economics easily absorbed the significant drop in oil prices.

These countries are also actively supporting the rebalancing of the global oil market by taking a procative role in moderating the current production levels. The other two blocks of supply are currently pursuing diametrically post directions to both investments and resource management driven by the respective stakeholders.

But production from US companies is enabled by investors who are pushing marginal projects

“The production level from the U.S. land E&P companies which currently represent around 8% of global oil supply is largely driven by the U.S. equity investors who are encouraging, enabling and rewarding short term production growth inspite of marginal project economics.

The fast barrels from U.S. land are facilitated by a factory approach to both drilling and production and supported by a rapidly scalable supplier industry with a low barrier to entry. In this market the pursuit of equity appreciation outweighs the lack of free cash flow, net income and return on capital employed for both E&P companies and the service industry.

And although the fast barrels from U.S. land have already cooled the oil price sentiments as well as the evaluation of the equity investments themselves, this has yet to limit the investment appetite for additional production growth.”

IOCs are tapering

“The last book of producers making up the rest of the world today represents over 50% of global oil production and covers a broad and diverse group of IOCs, NOCs, and independent operators. In aggregate, this group is for the third successive year highly focussed on meeting the cash return expectations of their shareholders whether these are equity investors or governance. The operators meet these requirements by striving to keep production flat by producing their existing outlets part of their normal and by limiting investments to what provides short term contributions to production at the expense of increasing deflection rates. These producers have also benefited from a production tailwind of 500,000 barrels to 700,000 barrels per day in each of the past three years coming from new projects where the majority of the investments were made in previous years. And with a low rate of new projects being sanctioned since 2014 this tailwind will taper off in the coming years.”

On balance the supply and demand dynamics should balance

“So, how does this supply and demand situation translate into the current status of the oil market? Following the extension of the OPEC and non-OPEC production cuts agreed in late May, the oil markets and also included, we are expecting to see clear reductions in global inventory levels in the second quarter leading to a more positive sentiments in the oil market. Instead, oil prices and market sentiments became unexpectedly more negative driven largely by fear of oversupply from the growing production from U.S. land where investments and activity is booming. ”

US investors have spooked the oil markets

“What we are currently witnessing is that the U.S. equity investors and E&P companies have spooked the oil market investors into believing that the fast barrels from U.S. land will flood the markets and leave inventory levels elevated for the foreseeable future. Therefore their pursuit of short term equity returns from the U.S. land E&P stocks is actually preventing the recovery of the oil market and sending oil prices further down thereby eliminating any equity appreciation that the investments set out to create in the first place.”

US industry will be more strained in this environment

“the fact that the industry in North America land continues to operate way beyond cash flow. I think that’s going to be challenged if oil prices stay where it is. So that could mean for sure that the growth rate would slow. I don’t think you’ll see a significant reduction in activity, but I think the growth rate might slow. So I think there is still going to be possibilities both to land and potentially raise more equity, but in the event we continue at the current oil prices. I think the industry is going to be a bit more strain than what we have seen in 2017.”

Schlumberger 1Q17 Earnings Call Notes

Paal Kibsgaard

North America investment increasing, but ROW underinvesting

“Turning next to the business outlook. We maintain our constructive view of the oil market, and we made further inventory growth in the second quarter, driven by the OPEC and non-OPEC production cuts put in place in January. At present, the region in the world showing clear signs of increased E&P investments in 2017 is North America land, although investment levels in the Middle East and Russia are also expected to remain resilient this year. However, for the rest of the world, which still make up more than 50 million barrels per day of oil production, we are heading towards a third year of significant underinvestment, which increases the likelihood of a medium-term supply deficit as produced reserves are not replaced in sufficient volume.”

Depletion is rapidly accelerating

“In particular, the market continues to focus on headline decline numbers that suggest that production is holding up well, while a closer examination of the underlying data clearly shows that the rate of depletion of proved undeveloped reserves is rapidly accelerating in several key non-OPEC countries.”

Biggest underinvestment is in exploration

“The current level of underinvestments is most visible in exploration, where the record-low investments, including both drilling and seismic, led to a total amount of industry discoveries of less than 5 billion barrels in 2016 versus a produced volume of over 30 billion barrels, dropping the industry-wide reserves-to-replacement ratio to 32%.”

Reached bottom internationally, but only flat underlying activity

“Internationally, as I said earlier, we have reached bottom in all markets. But for the second quarter, we only see, at this stage, flat underlying activity in Q2. So the – really, the only growth that we are going to see in the second quarter is going to be limited to the seasonal recovery in the North Sea, Russia and China.”

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.

Schlumberger 3Q16 Earnings Call Notes

Schlumberger’s (SLB) CEO Paal Kibsgaard on Q3 2016 Results

We have indeed reached the bottom of the cycle

“After seven quarters of unprecedented activity decline, the business environment stabilized as expected in the third quarter, confirming that we have indeed reached the bottom of the cycle.”

Optimism in Argentina

” In Argentina there is clear optimism amongst the industry players that the new government will take the required steps to further encourage E&P investment in the country as they seek to reduce the oil import dependency, which should have a positive impact on E&P investments in 2017.”

Supply and demand of crude is more or less in balance

“Turning now to the oil macro, the supply and demand of crude is now more or less in balance as seen by the flattening global petroleum inventories and the start of consistent growth towards the end of the quarter in particular in North America. In addition, oil demand was again revised upwards in September and is now forecasted to be around 1.2 million barrels per day for both 2016 and 2017. At the same time global supply is plateauing as non-OPEC production continues to experience significant declines and even offsetting record production levels from OPEC in September. ”

The period of oversupply is over

” the period of oversupply and inventory build is over and that market segments should soon change, paving the way for an increase in oil prices and subsequently E&P investments. ”

See a clear path to profitability in drilling

“So in terms of the reason for mobilizing more equipment into the drilling side is clearly that we have a clear path towards profitability. So given the unique technology offering we have and the technical challenges of drilling these very, very long horizontals we are able to get pricing which is going to give us I think ultimately the returns that we’re looking for. And this is why we are prepared to put more capacity into play on the drilling side or what’s going on in West Texas. As I said on the fracturing side, still there is no clear path towards profitability and this is why we are still maintaining presence and basically holding the fort until we believe we can justify putting more capacity into play going forward.”

Recovery in most places around the world and an uptick in investment

“we believe that there is early signs of recovery in most places around the world. If you look at next year for international, we expect solid growth year-over-year in the Middle East and Russia on a full year basis. But we also see, I would say an uptick in investment and activity in Latin America and in Europe, Africa. The only place where we don’t see any signs of recovery at this stage is in Asia.”

Not a big turnaround in exploration yet

“I don’t think there is yet a big turnaround I would say in the exploration market or in the seismic market. But I think we have positioned ourselves very well in both of those markets. “

Schlumberger 2Q16 Earnings Call Notes

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”

Schlumberger (SLB) President of Operations Patrick Schorn at Wells Fargo Energy Conference

Schlumberger (SLB) President of Operations Patrick Schorn doesn’t think oil is going back to its recent highs

“The current downturn is now 20 months long since the US land rig count peaked in October 2014. It already outpaces that of 1986/87 and estimated E&P spend for 2016 is now about a third below that of 2014. At such levels, continual growth in production capacity cannot be maintained, and production lost to decline cannot be fully replaced.   E&P capital expenditure has been cut with exploration halted, development aggressively curtailed, and service industry prices relentlessly squeezed. While this playbook might have allowed the business to return to normal in the past, we do not think that oil prices will return to their previous high levels any time soon, short of a major supply upset, given the greater availability of lower-cost Middle-Eastern supply and the progress that has been made in the cost of unconventional resource development in North America.”

Still seeing pricing pressure amongst their customer base

“While minor increases in rig count in North America together with the move toward completing the inventory of drilled but uncompleted wells are positives, pricing pressure and the significant excess of service equipment will limit our earnings potential until 2017.  With oil prices now increasing we will be seeking to reverse the temporary pricing concessions we have made. Furthermore, as this picture develops, we will continue to focus on matching resources to activity, leveraging transformation initiatives, and maintaining the longer-term operational and technical infrastructure that will be needed in the future.”




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.”

Corporate Annual Reports And CEO Interviews 3.24.16

Source: John Deere Annual Report

John Deere (DE) CEO Sam Allen said the farm equipment recession of the last few years has been the worst in nearly a century

“In relation to the farm economy’s robust years earlier in the decade, the current downturn has been quite dramatic. Since peaking in 2013, industry sales of large agricultural equipment in the United States have fallen more than 60 percent. Deere’s total equipment sales have declined more than 25 percent from their high. Last year’s sales decline was the company’s largest in percentage terms since the 1930’s.”

Source: Richemont (owner of luxury jewelry brands such as Cartier, Van Cleef & Arpels) CEO Youtube Interview=

Richemont CEO Johann Rupert said the true price of capital is obscured in today’s economic environment

“We have a lot more competition, especially from ridiculously mispriced capital. When people misprice something, it is abused. In England, water is free, it rains all the time yet there is a drought. Now, if you misprice capital, people will abuse it and will regret it, unfortunately in our business as well.”

Richemont CEO Johann Rupert stated you should always be improving your business whether we are in an economic expansion or economic recession

“Never waste a good recession. Never waste an opportunity to fine tune your business.

Source: Schlumberger Annual Report

Schlumberger (SLB) CEO Paal Kibsgaard remains constructive on both the supply and demand of the oil markets ultimately coming into equilibrium in the medium term

“We remain constructive in our view of the market outlook in the medium term and continue to believe that the underlying balance of supply and demand will tighten. This will be driven by growth in demand, weakening supply as the massive E&P investment cuts take effect, and the size of the annual supply replacement challenge. In continuing to accelerate the benefits of our transformation program across both our Technologies and GeoMarket regions in 2016, we believe that we will emerge as a stronger company once the price of oil and the market conditions in our industry improve.”

Source: Autozone Annual Report

Autozone (AZO) CEO William Rhodes said the company is prioritizing their E-commerce auto parts websites in order to get their products to consumers quicker

“We are expanding our fast-growing internet offerings. Utilizing our, and websites, we believe we are well positioned to serve our customers however they elect to interact with us. In 2016, we will continue our focus on both expanding our online product offerings and improving the shopping experience. While this business is growing at a faster pace than our “brick and mortar” business, it remains small in absolute terms. However, over time, as mobile shopping intensifies, it will only expand. We have to stay out in front in this sector of our industry. Our customers expect us to offer this shopping convenience and additional avenues for trustworthy advice to maintain, enhance or repair their vehicle.”

Source: Leucadia Annual Report

Leucadia (LUK) CEO Richard Handler said his company is undervalued and prepared to weather the stormy economic environment

“As we write, there is continuing volatility in the fixed income and equity trading markets, as well as in energy prices. Scratches and dents seem inevitable and we won’t dare make predictions for the rest of the year, but based on the actions we have taken to date, our businesses are prepared to weather the storm, and several are doing quite well. We are both aligned long-term investors in Leucadia stock and will continue to work our hardest to deliver good results in the coming years. There remains significant long-term upside in the value of Leucadia, which exists in the intrinsic value of our businesses and is not fully reflected in our current dismal stock price. We will discuss all of our businesses later in this letter.”

Source: Bank of New York Mellon Annual Report

Bank of New York Mellon (BK) CEO Gerald Hassell reiterated the company’s new mission statement

“We play an important role in the financial marketplace and describe ourselves as the Investments Company for the World. Our mission is to help people realize their full potential by leveraging our distinctive expertise to power investment success. In doing so, we seek to improve the lives of countless people globally – a goal that motivates us to be the very best at what we do.”

Bank of New York Mellon (BK) CEO Gerald Hassell said the company remains the dominant vendor for central banks and pension funds

“Our clients include three-quarters of the Fortune 500, central banks that hold approximately 90 percent of all capital and more than two-thirds of the top 1,000 pension funds.”

Source: Moody’s Annual Reports

Moody’s (MCO) CEO Ray McDaniel said the company is benefiting from several tailwinds in the financial markets

“We manage through cyclical conditions, while focusing on and investing around the deeper pull of structural market evolution: phenomena such as the disintermediation of credit, the demand for enhanced risk management techniques, the need to curate increasingly vast quantities of financial information and data and the development of emerging economies. These are powerful dynamics and they reveal an open road beyond the rubbernecking that often surrounds day-to-day market sentiment.”

Moody’s (MCO) CEO Ray McDaniel noted a choppy economic environment is creating uncertain buying patterns across their customer base
“Financial markets continue to be buffeted by volatility stemming from, among other things, uncertain global economic conditions, diverging monetary policies and geopolitical events. These dynamics (and their inter-relationship) create cross-currents and choppiness that unsettle market participants. This in turn impacts both the short- and long-term outlook for Moody’s.”

He elaborated that markets getting harder to interpret

“Markets are becoming more complex, not less, and are moving more quickly and featuring more choices. The need for products and services that illuminate and enhance the understanding of risk is essential to market confidence, and that confidence is essential to the sound management and efficient movement of global capital. Moody’s focus and opportunity involves filling the gaps that complexity, volume and information inefficiencies create.”

Source: Potash Annual Report

Potash (POT) CEO Jochen Tilk said increased global demand for protein will benefit his agricultural nutrient focused company

“By 2050, the world’s population is expected to grow by another 2.3 billion, reaching 9.7 billion. At the same time, diets are improving in many regions. These facts add up to greater demand for food, which will require increased crop production even as the amount of arable land per person is declining. With the world counting on increased yields from farmers, fertilizers will continue to be essential in keeping soils healthy. The role of fertilizers cannot be overestimated: they are responsible for half of all crop yields and without them, we believe the world would be incapable of feeding itself. ”

Source: Wells Fargo Annual Report

Wells Fargo (WFC) CEO John Stumpf said the company is still a relationship oriented business

“The most powerful expression of our heritage isn’t in documents or artifacts or even our stagecoach. It is in any of the millions of relationships we have formed over generations with customers, team members, communities, and shareholders. Relationships define Wells Fargo. Earning lifelong relationships, one customer at a time, is fundamental to achieving our vision.”

Source: Mark Fields Business Insider Interview

Ford (F) CEO Mark Fields said cars on the road today are lasting longer than ever, suppressing demand for their products

“We have worked very hard at quality over the last number of years, and our quality is in the top echelons of the industry. So part of it is vehicles are lasting longer. When I was growing up, when you saw a 20-year-old car it was like, Oh my gosh — that thing’s on its last legs. Now you see a 20-year-old vehicle and in many cases it looks pretty good. So part of it is that, but the other part is when we went through the downturn, clearly there were a lot of deferrals of people replacing vehicles.”

Ford (F) CEO Mark Fields noted that economic volatility and currency wars are making the automobile manufacturing business a more competitive landscape

“For us the main policy is making sure that currency is not used as a weapon, if you will, to manipulate the cost of products, whether they’re imported or exported. We can compete with anybody around the world. We can’t compete with central banks.”

Schlumberger 4Q15 Earnings Call Notes

Paal Kibsgaard

Annual budgets were exhausted well before the half way point of the quarter

“For many of our customers, available cash and annual budgets were exhausted well before the half way point over the fourth quarter, leading to unscheduled and abrupt activity cancellations, creating an operating environment that is increasingly complex to navigate and where the traditional year-end product and multiclient seismic sales were largely muted.”

We still believe the underlying balance of supply and demand continues to tighten

” we still believe that the underlying balance of supply and demand continues to tighten, driven by both solid growth in demand and by weakening supply as the dramatic cuts in E&P investments are starting to take effect. In North America, our shale oil production is declining more or less as we expected and was in December below the levels from one year ago.”

We have gotten the low hanging fruit of cost cuts but now we’re getting to a deeper part of the transformation

“I think it’s fair to say, like you say that a lot of the low hanging fruits we’ve already picked, but we’re now getting into the deeper part of the transformation where we’re making significant structural changes to how we go about doing our work and conducting our business. ”

$5B of FCF in this environment is not bad

“2015 was another solid year. It was not perfect. There were several things that I think we could have done better, but $5 billion of free cash flow in this environment is not bad. “\

Don’t think that 2017 will be worse, but not ready to say we’re troughing in 2016

“I think it’s too early to say Jim, but I’m — I don’t currently think that 2017 is going to be worse. I think — but with that said, I’m still not ready to say that we are troughing in 2016. I’ll be focusing in on executing basically quarter-by-quarter. I’m still optimistic, and I would hope that 2016 is the trough, but I’m not ready to rule on it yet.”

2016 will be another challenging year

“2016 will be another challenging year during which we will aim to continue to deliver superior financial results empowered with proceeding and capitalizing on the broad opportunity set the current market environment presents. “

JS Earnings Call Notes 1.24.2016 – Schlumberger

During the recent slump in the price of oil, Schlumberger cited North America as their weakest geographic zone

“The asset impairment charges largely relate to our North America business, which as you know has been the hardest hit during this downturn.

And they have dramatically reduced the pricing of their services in order to keep customers but they’ve also been able to reduce expenses 

“Our fourth quarter revenue of $7.7 billion decreased 9% sequentially. Approximately one-third of the revenue decline was attributable to pricing.  Despite the very challenging environment, both in terms of pricing and activity, pre-tax operating margins only declined by 132 basis points sequentially to 16.6%. This was due to continued strong and proactive cost management across the entire organization.”

Yet despite the weakness, the business still generates a fair amount of cash

“Our cash flow generation continues to be very strong. During all of 2015, we generated $8.8 billion of cash flow from operations. During the fourth quarter, we generated $2.2 billion of cash flow from operations. This is all despite making severance payments of approximately $800 million during 2015 and $200 million during the fourth quarter.  In light of our strong cash flow generation, yesterday our Board of Directors approved a new $10 billion share buyback program.”

Schlumberger (SLB) CEO Paal Kibsgaard called the recent downturn in the oil price a “financial crisis” 

“Negative market sentiments intensified in the fourth quarter with global oil production of oil continuing, extending the various trend in global oil inventories and causing a further fall in oil prices, which reach a 12-year low in December. The worsening market conditions added further pressure to the deep financial crisis throughout the oil and gas value chain and prompt the operators to make further cuts to the already low E&P investment levels.  For many of our customers, available cash and annual budgets were exhausted well before the half way point over the fourth quarter, leading to unscheduled and abrupt activity cancellations, creating an operating environment that is increasingly complex to navigate and where the traditional year-end product and multiclient seismic sales were largely muted.”

Schlumberger (SLB) CEO Paal Kibsgaard added the longer the recession continues in the oil patch, the stronger the company will emerge relatives to its competitors 

“So while we all look forward to a recovery in the oil price, and the market conditions in our industry, it is evident that the longer the current market environment continues, the stronger we will emerge as a Company relative to our competitors when the upturn ultimately comes.”

Schlumberger (SLB) CEO Paal Kibsgaard said new technology in the oil services sector is bringing the cost to pull a barrel out of the ground lower

“Yes, during this downturn the level of new technology sales which is basically technologies that we have commercialized in the past five years is at a significantly higher level than what we’ve seen in previous downturns.  This is partially down to the broad range of technologies that we have, and in fact that a number of them are focused on driving, I would say cost and efficiency for our customers. And these type of technology are as valid in terms of being bought and being operated during the downturn as they are in the upturn.”