EOG 2Q17 Earnings Call Notes

Bill Thomas – Chairman and CEO

Quantity, quality and breadth of data drive tech advantage

“I can’t emphasize enough that EOG’s quantity, quality and breadth of data drives our information technology advantage. First, we believe we have multiple times more data on horizontal oil wells than anyone in the industry. More importantly, the data is proprietary. The type and granularity of data and the frequency of collection is customized to our needs. Second, we are constantly experimenting and applying and learning to the next well. EOG’s cultures is to always question and push the envelope on what can be done. The result is terabytes of differentiated data capturing results of thousands and thousands of experiments. The application they’ve built in-house analyzed and delivered all the data real time better than any other comparables suite of applications in the industry. However, these applications are virtually useless without the big data and the culture of experimentation and innovation you need to drive data science in the first place.”

Core Labs 2Q17 Earnings Call Notes

David Demshur – CEO

Increasing interest in enhanced recovery from shale reservoirs

“The first major trend is the increasing client interest in enhanced oil recovery from unconventional reservoirs. Early work performed by Core has indicated possible recoveries increasing from an average of about 9% in share reservoirs to 13% to 15% by utilizing engineered gas absorption techniques, gas recycling and the laws of physics and thermodynamics”

Using micro proppants

“The second major trend is the interest in using finer proppants or micro proppants in the initial procedures in a hydraulic fracture program. Core via our industry wide profit consortia with a 30 plus year history and consisting of over 40 companies is boosting its evaluation of 100, 200 and 400 non-API mesh sand. These macro proppants are thoughts to open secondary and tertiary fracture patterns significantly increasing the stimulated reservoir volume. Therefore, increasing initial flow rates as well as the estimated ultimate recovery from the wellbore.”

Lateral length may have reached their maximum

“The third major trend is that lateral length may have reached their maximum owing to frictional forces of pumping the frac fluid and its profit. However, Core is currently testing friction reduction additives to once again allow for longer laterals. Pad drilling and completion programs rule today and are causing the recent disconnect in wells drilled and wells completed in the last two quarters. Wells drilled and completions will start to mirror each other in the second half of 2017.”

10k feet appears to be the maximum

“right now the average lateral length is about 10,000 feet. That expanded from number of years ago from an average of 7,000 -8,000 feet. The problem is the frictional forces in pumping the proppant and fluid at or about 10,000 feet. You don’t get enough effective pressure to actually do a good job in fracturing the reservoir. ”

Can’t continue to outspend free cash flow. Markets will be tighter this time around

“I think we stay in a $45 to $50 environment. You are going to have a number of the private operators probably laid down some rigs. So we wouldn’t be surprised if we saw a contraction in the rig count by maybe 50 to 100 rigs by the end of the year. That’s kind of what our guidance is based on where we toned down what the expectation for revenue was for Q3. And it’s based on a flat to possibly down rig count. They can’t continue to outspend their free cash flow because in our view the equity markets and the debt markets will be much tighter this time around than maybe year or year and half ago”

Dick Bergmark

If crude persists below $50 rig count may contract in the second half

“If crude persists below $50 per barrel, the U.S. land-based rig count may actually contract in the second half as we do not believe operators can continue to outspend free cash flow with debt and equity markets likely closed to them for additional capital. This observation is not withstanding the continual decline in the global crude oil inventories and the impact this will have once the decline falls below the five-year average inventory level.”

Increasing number of DUCs because of a shortage of equipment

“Further, in the U.S., We are experiencing the impact of the prevailing market and transitory industry issues of U.S. labor and completion equipment shortages, which is expected to continue through year-end. The increasing number of DUCs, as reported by the EIA throughout 2017, is evidence that completions have not been able to keep up with the pace of drilling. The shortage of equipment is an issue for operators getting crews to complete wells which are why DUCs went up. Many EMP analysts wrote about this as the issue became more problematic as quarter went on. The pressure pumpers spoke about this in their own vernacular on the recent calls. The reason they are bringing equipment of out of cold stock is because they are short spread. They wouldn’t be spinning money to bring them out of storages if they were not short equipment”

Halliburton 2Q17 Earnings Call Notes

Dave Lesar

Last call for Lesar

“Since this is my last call, today I want to share with you my view of the evolution of the North America land market. Our customer base there and why I believe it will continue to surprise to the upside. Now for 25 years I have had fantastic front row seat to the development of US unconventional resources. We have become the largest service company in North America and that growth didn’t by accident. First, it was due to the leadership of Jim Brown and his visionary management team. They saw the potential of unconventional resources in the region but the same time as a group of key early mover customers. As a result, we decided to work together using lots of trial and error to unlock this resource. We established enduring customer relationships and gained unparallel base and knowledge that still provides us a sustained advantage today.”

US operators do not operate as a group

“Currently, there is strongly held view by energy investors that the US independent operators behave as a group. That view is wrong. When thousands of companies make discrete decisions about the same market, each day they do have tendency to swing the activity and production pendulum to far one way or the other. That is not group bank, is the impact of individuals trying to do the right thing for their investors.”

*The development of unconventional resources has been as disruptive to the global energy market as Amazon to big box retailing

“[US independent operators] are you are classic American entrepreneurs, and their success should recognized. In Silicon Valley, such a success would be greatly celebrated as another industry disruptor. The unconventional disruption is not widely celebrated beyond the energy space, but it should be. The development of US unconventional resources has been as disruptive to the global energy market as Amazon has been to Big Box Retailing or Uber to the taxi business. You don’t leash to wave of cheap, reliable energy that is disrupted global geopolitical and energy dynamics. Made the US more energy independent caused OPEC to react and changed the fundamental economic of offshore production. And I believe it is created a hundreds of billions of dollars of economic value, added hundreds of millions of dollars to government tax coffers and provided untold savings for consumers. So unconventional is what I would call a disruptor, so let’s celebrate that.”

Don’t bet against animal spirits

“I said several quarters ago the customer and animal spirits back and they are with a vengeance and they are now running free to North America. Here is my last piece of wisdom for you. Do not bet against the animal spirits that our North America customers embody. I never have and I never will because that is the bet that you will lose.”

Jeff Miller – President and CEO

customer demand has outpaced supply of completions equipment

“today, we believe the current customer demand has outpaced the supply of completions equipment and this should create runway for a strong utilization through the second half of the year. We remain committed to generating industry leading returns and reactivating our equipment was the first step towards delivering the results you have come to expect from us. As some of you’ve heard me say before, customer urgency is the foundation for the path to normalize margin. Today, our customers remain urgent. And therefore, we believe our path to normalized margins is achievable. We get there through a combination of increasing leading pricing, improved legacy pricing, better utilization and continued cost control.”

Decline in average sand pump per well

“For the first time in years, in the second quarter we experienced our first decline in average sand pump for well. Let me repeat that because I think this is important. We saw a decline in the average sand pump per well. And while this is only one data point, it’s something we will be watching. We believe current sand price levels have encouraged operators to optimize their completion design using more science as opposed to simply maximizing sand and trade for increased production.”

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.”

TAG Oil’s (TAOIF) Q4 2017

Toby Pierce – CEO

They chose equity to debt for a reason

“As we looked at all the options, and specifically in March timeframe when prices were – oil prices were more robust, they were in the $55 a barrel Brent range. We anticipated the market to stay flat or oil prices to stay about mind you or they increase and obviously we were wrong on that point. So we are actually quite happy that we use that raised equity instead of debt. Debt in an oil and gas company can be very detrimental if you get the timing wrong. In addition, I have to say you definitely need to hedge out any depositions. Most reserves based lenders and most debt providers will require you to hedge out a portion if not all of the debt and that can make, that sort of sets your price and your price floor, so you don’t get to experience the upside in the oil price if you hedge out. We took the opportunity at the time to raise capital to focus on incremental drilling and to really get our cost per barrel down and so move the oil company forward.”

On acquisitions

“Are we going to do more acquisitions? It’s very hard to say. It’s a great deal presents itself. We’ll definitely consider it. In this type of market and sideways market, more distressed sellers may occur, may emerge. And we do have our sights on two or three, but we’re very patient and we’re not going to over pay”

He sees oil prices rising on supply crunches

“my personal view is we will probably edge back in the $60 range by the end of calendar 2017. I think it will be in the high 50s, low 60s….the amount of capital that’s actually come out of spending programs, globally depends on who you read, but its on the order of $1 trillion to $2 trillion, and that capital is not being reinvested in. It will start to cause declines with some point. So while we do have production growth in the Permian and it’s a fantastic resource, I do believe that the supply and other things will have a supply crunch at some point and we’ll see high oil prices. “

ConocoPhillips’ (COP) at Bernstein Strategic Decision Conference

Ryan Lance – CEO

Their strategy

“…in a range of $50 to $60 a barrel, we will maintain a strong balance sheet and we’ll allocate cash between per share and absolute growth. At higher prices and at lower prices, we’ll exercise flexibility and take the highest value actions for our shareholders.”

Do expect some volatility

“…we see there is probably going to be a lot of volatility. There is a reasonable case that says the lack of investment over the last 5 years, 6 years might lead to higher prices coming over the next couple.”

They are not worried about inflation

“…when I look across our whole portfolio today and I compare 80% of our capital is going internationally into areas that are deflating. So, I don’t worry in our portfolio about the inflationary pressures but I am certainly worried about the activity that we are doing in certain basins and in certain categories of spend.”

But they will evaluate the impact of persistent inflation

“…we will look at our plans later this year. But if we see persistent inflation that starts to erode the margins, we will allocate capital, the lowest cost to supply highest margin opportunities in the portfolio.”

Oil at $50 is not going away any time soon

“…back about 4 years, 5 years ago I was invited to the Vienna meeting. I was on the stage like this in front of all the big OPEC crowd with at the time, Ali Naimi, who is the Minister of Saudi Arabia, the Venezuelan oil minister, the Iranian and I got up and I told them that U.S. would surpass Saudi Arabia in production in 5 years. And I got laughed off the stage. And 3 years later, Naimi invited me back. He said, I will be damned, you are right. And we need to understand this a little bit more. And the message to him at the time was this isn’t going away in 3, 4, 5 years. So to put it in perspective, our industry has found over 400 billion barrels of resource in the last 10 years, 400 billion. That’s 10 crude oil days in the last 10 years in this business. And so I think the recognition that’s now coming is one that it’s real, that it is competitive at a $50 barrel price deck and it ain’t going away.”

Bob Brackett – Bernstein

Too much cash, too few projects

“And then in a world of extremely low interest rates, we have changed I always joke, if you fly to California and you go talk to Google or you go talk to Apple and say I have got capital for you to commit to technology and new ideas. They will say no thanks, we got more cash than we know what to do with. If you stop instead halfway in West Texas and ask people, hey, do you have anything you can use with all this capital, they will say yes, I can stick it in the ground.”

Halliburton at UBS Conference Notes

Jeff Miller – CEO

Greater rig productivity means fewer rigs for same production

“Yes. I think I certainly feel like I was a little high on my number. 800 feels very busy. And it’s happening like we thought in terms of the rig efficiency is there, which is driving substantially more completion activity. Fewer rigs drive more completion activity. We’re seeing that today not only in terms of number of stages, but sizes of stages has also compounded the level of activity. We’re up about three times what we were in 2014 in terms of sand volume, just pure volume. And so the demand is there and it’s driven off again, as I said, that lower rig count. And I don’t know that that it makes – it’s going to continue to move up, but it’s simply going to drive more and more activity.”

Momentum around pricing continues to move up

“I mean the momentum around pricing continues to move up. And so very positive. It really started in Q4 of last year where we really tried to probe the market to see if there was room to move. We saw some green shoots, but I’d describe it as a bar room brawl. It absolutely was brawling in Q4 last year to see if prices would move. As they started to move, that’s what precipitated our move in Q1 to accelerate reactivation simply as our team on the ground started to get a better sense of customer urgency, which ultimately drives pricing momentum. We were able to react very quickly then.”

*International going to tread water for a bit

“Look, I think international is going to unfortunately tread water for a bit. I don’t know that it needs to come back. We’ll continue to trim cost internationally. That team is working very hard. That team knows how to execute kind of in any market and I think will be effective. The infrastructure that we’ve built out doesn’t go away, but we will certainly scale that back as we look at markets that either have a – look at the timing form coming back. Some may never come back just given the producing power of the Middle East, North America and probably Russia will likely be more dominant. So there are some marginal markets that may not come back, but by and large, we manage in that every day in terms of where to be.”

Anyone that thinks they’re a commodity probably is

“anyone that thinks they’re a commodity probably is”

Conoco Phillips (COP) Q1 2017

 

Alan J. Hirshberg – ConocoPhillips

Efficiency drives improved energy production

“Our first quarter production out of this piece of our business was up 2% or 3% over what we were predicting, say, a quarter ago. And it’s the continuing drumbeat of improvements from technology and other efficiency drivers, things like data analytics that are helping us continue to get more and more efficient in the results that we get there….. If I had to call out one thing that’s really gained steam over the last couple of years and it’s paying significant dividends for us now, it would be just generically data analytics, big data where we’ve been working hard on that for quite a few years, but we’ve been able to standardize and drive it through more and more of our operations and have it much more handily helping us make day-to-day decisions on how to develop as a stronger force. ”

There is deflation in the non-shale outside the US

“…there’s really been no big changes in my views about inflation for this year versus the comments I made on the last quarter call. If I look at our spending year-to-date where we track this every month, we are still net deflation year-to-date as a company. So we’ve certainly experienced more deflation in our costs after the first quarter in 2017 versus 2016 and there is a mix there.”

Don Wallette, Jr. – ConocoPhillips

Deflationary impacts of improving productivity and efficiency outside of the U.S. is expected to persist this year

“Our model predicts that we will continue to see deflationary forces throughout this year outside the U.S. internationally, but that they’ll be becoming smaller and smaller, and that by the time you get to next year that you would stop seeing significant deflation even outside the U.S. and that would start to even up”

Recovering oil prices help boost the bottom line

“This quarter, Brent averaged about $54 a barrel and Henry Hub averaged about $3.30 an MCF. This resulted in an average overall realized price of about $36 a barrel. We reported an adjusted loss of $19 million or $0.02 a share. Year-over-year, adjusted earnings improved nearly $1.2 billion. The biggest driver was a 58% improvement in realized prices, but we also benefited from the actions we’ve been taking to improve our cost structure…One way to think about this quarter is that with $54 Brent, on an adjusted basis, we were very close to being profitable. ”

National Oilwell Varco 1Q17 Earnings Call Notes

Clay C. Williams – National Oilwell Varco, Inc.

Customers are putting rigs back to work at an astonishing rate

“depleting production through the other 80-plus-million barrels a day of supply and another year of growing demand, the industry’s 159th, will inevitably lead to tightening. In the meantime, our North American customers are demonstrating that their economics work even at current oil prices in many North American basins by putting rigs back to work at an astonishing rate.”

Seeing scarcity return to sectors of the oilfield

“After a couple of very, very rough years, we’re seeing scarcity return to certain sectors of the oilfield, sectors where NOV plays an important supply role. Strategically, we have positioned NOV within the sectors we see as most likely to face scarcity as the upcycle emerges, including horizontal drilling that is growing rapidly in unconventional basins today.”

New rig building is still a ways out

“Yeah. On the land rig newbuild outlook, we are continuing to pursue those tenders in the Middle East. And there’s been I think some – there’s been a lot of public discussion about those. And just so you’re aware, lots of the NOCs in the Gulf States and in The Kingdom are discussing putting more land rigs to work. It’ll be a combination of existing rigs and newbuilds. And those various tenders are moving at different rates, but it’s a meaningful number of rigs.

And then in the quarter, we did see demand blossoming in a couple of other regions. In our conversations with North American drilling contractors, I do think new rig building is still a ways out. But the good news for all of them and us is that dayrates are continuing to march up and we’re currently selling into that trend in terms of upgrading the torque and pressure capabilities of rigs. So adding a third mud pump, adding a fourth genset, adding hightop torque drives, top drives to those rigs.

But I think once dayrates get up into the mid-$20,000 range a day, I think that’s really where you see meaningful demand for new rigs across the North American market. And as Jose just said just a moment ago, past cycles are a guide. They all seem to phone us at once seeking to put those rigs to work”

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.”