Apache 4Q16 Earnings Call Notes

John J. Christmann

Stephen Riney

Hedged oil price at $50

“Over the past several weeks, we have entered into put option contracts providing a floor of $50 WTI and $51 Brent for most of our second half 2017 oil production. With this protection in place, we will move forward with our Permian Basin capital program knowing that any price weakness will not cause a funding shortfall. We chose to use put options to mitigate the risk, while maintaining full exposure to upside price potential.”

EOG 4Q16 Earnings Call Notes

William Thomas

Starting to see some encouraging signs on inventory drawdown

“Scott, I think we’re watching the oil market, particularly inventory levels. And I think just in the last week or so, we’re starting to see very encouraging signs on inventory drawdown, and I think we’re getting close. It won’t be in the next month or two. I think we’re going to know a lot about how the OPEC cuts have affected supply/demand dynamics and the drawdown of that inventory. So we’re about there, but we just need a little bit more time on that. I think the other thing is, with the rapid ramp-up of drilling rigs in the U.S., we don’t want to ramp up too rapidly to decrease the capital efficiency. So we’re very committed to keeping the capital efficiency of the company extremely high, and we really only want to increase the capital efficiency. So part of our ramp-up strategy will be certainly to stay very disciplined, to allocate the capital to obviously the highest return investments that we have, and then do it in a systematic manner where we’re bringing in really good equipment, really good people, and we don’t lose performance there.”

National Oilwell Varco

Clay C. Williams

This downturn has been unusually grim and painful

“Frankly, I’m glad 2016 is behind us. In the fourth quarter, we benefited from rising momentum in North American shale plays in particular, which we expect to accelerate. Our international markets still face headwinds for a quarter or two and offshore markets continue to trend down, so we still have challenges ahead. Nevertheless, $50 oil has been a welcome relief. I attribute my gray hair to the many previous downturns I’ve been through, 1986, 1991, 1999, 2002, and 2009. They all required difficult decisions and cost reductions, but this one has been unusually grim and painful. E&P customers cut spending two years in a row and current CapEx is just half the level seen just two years ago. Last year, global exploration discoveries were the lowest they have been since 1947. And in May of last year, the U.S land rig count dropped to the lowest number ever recorded. The industry responded as we always do. Teams have gotten smaller and facilities have been shuttered as purchase orders evaporated.”

Great companies use downturns to innovate

“There’s no better team in oilfield services, and I’m grateful for each and every one of you every day. Like me, they recognize that as hard as they are, downturns are an opportunity to become better. Great companies like NOV use downturns to reexamine how we do things and then take action to drive better efficiencies, actions like taking costs out of manufacturing processes, actions like streamlining supply chains and collapsing cycle times, so that we can deliver NOV’s technologies to our customers when they need it. Great companies like NOV use downturns to innovate”

Drilling much different today than the 80s

“In a low oil price world, accomplishing lower cost per barrel becomes a necessity for our customers. At great companies like NOV, invention follows. I started in an industry very different than today’s. In the early 1980s, almost all drilling was done vertically with mechanical rigs or occasionally DC electric rigs, using a kelly to turn roller-cone bits. Wells took months to drill. U.S. production was declining following its peak more than a decade earlier. A generation later, we drill horizontal wells with PDC bits turned by downhole drilling motors and drill pipe turned by top drives, and we’re doing it with fit-for-purpose AC rigs and massive frac spreads to execute dozens of stages.”

It’s not a stretch to say the seeds of this boom are a result of the 80s downturn

“The downturn of the 1980s was also particularly severe. E&P operators faced the very same challenges they always do when oil prices plummet, how to improve cost per barrel, again, a necessity to survive and again invention followed. I credit the downturn of the 1980s with the inventions of measurement-while-drilling [MWD] systems, logging-while-drilling systems, top drives, rotary steerables, horizontal drilling technology, and PDC bits technologies that frankly enabled the shale revolution. It’s not a stretch to say that the seeds of this amazing new source of oil and gas from shale are a direct result of the downturn of the 1980s. NOV helped lead the way. In 1982 we introduced the top drive, and since then our NOV brand name has become synonymous with a technology used on most rigs worldwide.”

Shale is incredibly consumptive of equipment

“The big picture here is that shale technologies are extremely consumptive of even the most reliably built equipment. Shale is insatiable. It wears out rigs and frac iron. It consumes drill pipe bits, drilling motors, frac spreads, treating iron, and a whole host of expendables like valves, seats, coil tubing, and shaker screens. It’s like feeding a Labrador. As the worldwide leader in the manufacture of all of these, I like NOV’s competitive position.”

The outlook for 2017 is getting brighter

“net-net, we are benefiting from reactivations of land rigs going back to work in West Texas. And I believe – we’ve been saying for the last two years our customers are great at cannibalizing their existing stocks of spare parts, and that’s certainly been going on in earnest. At some point, they’re going to run out of opportunities to cannibalize, and so perhaps we’re seeing some of that turn around as well. So on the whole, I think the outlook for 2017 is getting brighter.”

Next gen rig takes data from sensors downhole

“But a lot of our prepared comments were what we think is the next-generation rig even beyond that, which is you take that rig and then you wire that drill pipe and you let downhole sensors drive a control system at the surface that operates customer apps that they can write to control the rig. That’s the rig that learned, the rig the future as we see it…This is a whole new area, James. The industry has not used high-speed data transmission from the bit to operate the rig machinery in the past, and that’s really what this offers. So this is a whole new breakthrough in terms of technical capabilities. So we’ve got, as I mentioned, 57,000 bits per second coming up with vibration torque, weight on bit, stick slip information, all that stuff. And then the software takes that data stream – high-speed data stream and it adjusts the machines in real time. We actually have algorithms, heuristic algorithms that are altitude seeking that adjust the rig, weight on bit, strokes, et cetera to achieve the maximum ROP [Rate of Penetration] formation by formation. And so the machine learns effectively how to drill the stratigraphic section that it’s drilling in, and we think that’s the next big thing in drilling. So we’re very, very excited about this.”

Anadarko Petroleum 4Q16 Earnings Call Notes

RA Walker

Oil could average $60 in 2017

“From a global perspective, we’re beginning to see some encouraging demand improvements and supportive supply actions. And I continue to feel strongly that we have very good chance to see an average WTI oil price in 2017 of $60. When you combine our cash position with improving cash flows, we expect to be in an advantageous position to fund growth in both the Delaware and the DJ as well as the deepwater.”

Allocating to the DJ and Delaware

“As you look at us today, to be somewhat repetitive, I think the Delaware, the DJ, and the deepwater Gulf of Mexico, in that order of priority, will receive capital. As I mentioned in my prepared remarks, we have built a very attractive cash position, which we believe will allow us to execute on the development plans we have for the two primarily – the two onshore assets rather. And I think while we are very proud of them, I’m not sure there are any other assets onshore that are any better than the DJ and the Delaware to be allocating capital to.”

Doing a lot of planning for 2018, 19

“I will say, whether it’s the deepwater or it’s the onshore, 2017 is a year in which we’re doing a lot of things to prepare ourselves for 2018 and 2019. And that’s one thing as we come out of a trough, we just can’t immediately turn on a dime and expect that we’re going to go back to where we were before we went through the period of the last two years where the industry in general spent a lot less capital and had a lot less activity. ”

You’re not going to get a tremendous supply response until 2018, 19

“The only thing that I would say that’s a little surprising to me would have been that, if you recall, I thought domestic oil production in the U.S. would probably bounce off 8 million barrels a day, and we actually bounced a little higher than that. But I think – I use our own company as a bit of an analogy for this comment. I don’t think even with the rigs that are all starting to stand up, particularly in the Permian, and if you look even at what ExxonMobil has said about it this week, you couple that together, and it’s not like in 2017 you’re going to see a tremendous supply response that will dwarf the improving demand. I think that’s really more something to look at in 2018 and 2019. And it’s a little fuzzier when you look into the crystal ball at that point.”

Core Labs 4Q16 Earnings Call Notes

Core Laboratories’ (CLB) CEO David Demshur on Q4 2016 Results

Core believes that crude oil markets are undersupplied

“Core believes that the worldwide crude oil markets are currently undersupplied as indicated by several consecutive months of declining worldwide crude oil inventories. And we believe the projected December draw will be the fifth consecutive month in a row. Projected OPEC cuts of 1.344 million barrels of oil per day and other cooperating countries pledging to cut another 600,000 barrels of oil per day will lead to extended worldwide inventory declines and a continuing rally in oil prices and energy prices in 2017. As Core has continually stated, the Middle East was producing oil at unstable levels, and we are sure that some of these cuts will more than welcome by several Middle Eastern producing countries. All that Core did was listened to the reservoirs and not rhetoric.”

Markets more than rationalized in late 2016

“2017 is off to a better start as BP’s Thunder Horse South complex completed ahead of schedule and under budget is set to add 40,000 barrels of new 2017 production. Globally, Core estimates that the net decline curve rate is currently approximately 3.3%. Applying the 3.3% net decline curve rate to the worldwide crude oil production of approximately 85 million barrels a day means that the planet will need to produce an additional 2.8 million barrels of new oil by this date next year to maintain current worldwide productive capacity totals. With limited long-term sustainable spare production capacity coupled with the aforementioned production cuts, Core believes worldwide producers will not be able to offset the estimated 3.3% net production decline curve rate in 2017, leading to a further decline in global crude oil production. Also, weighing on future production capacity is the fact that operators discovered less than 4 billion barrels of new oil in 2016, while the globe consumed over 55 billion barrels. Therefore Core believes crude markets more than rationalized in late 2016 and price stability followed by price increases, some occurring as we speak, are returning to the energy complex. Remember, the immutable laws of physics and thermodynamics mean that the crude oil production decline curve always wins and it never sleeps.”

Highlighting some technologically sophisticated clients

” I would bifurcate the North American clients into those that are technologically sophisticated clients. And in that hand, certainly we would put Pioneer, Occidental, Apache, certainly — Concho Resources certainly would be another. These companies have been and continue to be innovative, like the project that we’re working on at HRL, formerly known as the Hughes Research Laboratory, and Pioneer where we are using machine learning expert guided analysis to pinpoint more highly productive areas within the acreages owned by Pioneer, which we’ll be able leverage to some of these other technologically sophisticated clients”

Dick Bergmark

Expecting the V shaped recovery to continue

“We are clearly benefitting from increased U.S. onshore activity and expect revenue and operating income to increase further in 2017 as international and offshore markets improve with additional major capital project announcements. These activities should drive our revenues higher in consecutive quarters throughout 2017, also expanding incremental and operating margins. As we projected earlier this year, our third quarter results established the bottom of the expected V-shaped recovery that we believe will continue into 2017. We believe that the global crude oil market is currently undersupplied. This is indicated by a recent IEA worldwide crude oil inventory data that has declined over the past four months and is projected to decline for the fifth straight month in December of 2016.”

Halliburton 4Q16 Earnings Call Notes

Dave Lesar – CEO

North America has turned the corner, but international downswing is still playing out

“Now, let me take a few minutes to discuss what we’re seeing in the market today, and our prospects and challenges for the coming year. Despite the positive sentiment surrounding North American land, it is important to remember that our world is still a tale of two cycles. While the North America market appears to have rounded the corner and is on the upswing, the international downswing is still playing out.”

Animal spirits are running but maybe in different directions

“Let’s talk about North America. On the second quarter call, I told you that customer animal spirits were back in North America. Last quarter, I said that these animal spirits were alive, but somewhat caged up. Now, these animal spirits have broken free and they are running. However, not all customers are running in the same direction or as a pack, but they are running. These animal spirits can be seen by the dramatic increase in customer M&A activity, energy industry initial and secondary company offerings, the significant private equity capital moving into resource plays and of course the increase in the rig count. Customers are excited again, and our conversations have changed from being only about cost control to how we can meet their incremental demand.”

Trading market share for better profitability

“In Q3, we told you that we were willing to strategically trade some of that historically high market share for better profitability. Clearly, the time had come to improve returns and that is what we told our customers. In Q4, as demand for our equipment increased and availability tightened, our customer discussions revolved around the unsustainable pricing that was in place and the need for us to make a return before we were willing to continue to work for them or add new equipment. If a customer agreed to better pricing, we continued to work for them, if not, we took that equipment and use it to fill the incremental demand with a customer that shared our view on how to work together and make better wells.”

US shale is swing producer, tough for deepwater to compete

“Most people agree that the U.S. is now the world’s swing producer and it has demonstrated its ability to ramp up production quickly at a price that may make it difficult for deepwater projects to compete. We believe that the race to get deepwater project cost down versus the impact on commodity prices on increasing U.S. shale production will have to play out over the course of 2017. Therefore, we do not expect to see an inflection in the international markets until the latter part of 2017.”

OUS portfolio doesn’t compete

“Yes. Jim, let me give you an anecdote. I was talking to the CEO of one of our IOC customers Friday, obviously not going to say who it was. And he said that there was not a single asset in their portfolio outside the U.S. that competes with their U.S. opportunities right now. And to me that’s a pretty amazing statement to me in terms of really how much further commodity prices have to go up to bring some of these more either highly complicated or longer duration projects to the front of the queue get an FID decision made around them.”

Jeff Miller

Talking about price increases

“First, I like talking about price increases more than decreases, it’s a nice change. Second, the service price recovery is starting from an extremely low base, in many cases below variable cash costs. Third, the level of pricing that satisfies a particular service company depends on where they are on the profitability continuum. Finally, even though the industry is starting in different profitability levels, every company will have to march back up the same path to profitability.”

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.

EOG 3Q16 Earnings Call Notes

EOG Resources’ (EOG) CEO William Thomas on Q3 2016 Results

Bill Thomas

Oil in the 40s not enough to sustain production growth

” Over the long-term we believe oil in the 40s will not sustain enough production to meet demand worldwide. While EOG can deliver strong oil growth within cash flow with $50 oil, we believe that US industry as a whole needs to sustain $60 oil prices and extended lead time to provide a moderate level of growth. Worldwide Base decline rates are slowly reducing supply and consensus view is the current large inventory overhang could return to normal levels by late 2017.”

Apache 3Q16 Earnings Call Notes

Apache (APA) Q3 2016 Results
John Christmann

Alpine High

“Now I would like to spend a few minutes discussing our Alpine High play. The Alpine High is an immense resource and a transformational discovery for Apache. We have invested a significant amount of human and financial capital through two years of extensive geologic and geophysical work and reservoir and fluid analysis. This was accompanied by concept testing an initial round of verification wells, the results of which we disclosed in early September. We are now engaged in a methodical appraisal and delineation program to confirm the geographic and stratigraphic extent of the play and to formulate our long-term infrastructure plan. This work will continue for the next several quarters before transitioning to an active development program once gas processing and transportation infrastructure is in place.”

Egypt is doing the right things

“In regards to Egypt, Brian, having just gotten back from there the week before last, and my third trip over there, I’ve actually seen President Al-Sisi twice this year. I’ve got to give them a lot of credit. They’re on the right path. They’re doing the right things. They’re in the process of securing a loan from the IMF. This is all part of a process to go through and start to take some of the subsidies out and do the things to put the country onto the right track. So I actually feel very good about where things are. Our relationship is good. I think they understand how important Apache is. So we feel very good about that aspect of it. They’ve just got to go through a reset. And the good news is they’re taking this head on and they’re working on doing that.”

Capital plan depends on what price we’re going to use

“What I would say is Alpine is going to get its capital. We’re going to invest to sustain North Sea and Egypt. Permian is going to get a big chunk of its capital. And then how that pie changes is going to be a function of what price deck we’re comfortable running with and how much capital we pour. So we’ve seen a lot of volatility. We’ve gone from the low $50s to the mid-$40s. And so obviously every $5 of oil price and the movement of gas price means a lot to us in terms of that. So as we start out 2017, a lot of that’s just going to hinge on what price we’ve got we feel comfortable using.”

Stephen Riney

Egypt going through a tough time

“And then, just as a general rule, on a day-to-day basis, we generally hold a pretty minimal amount of Egyptian pounds at any one point in time. And just as an example, at September 30 we had a little over $50,000 worth of Egyptian pounds on hand. So the actual exposure to the Egyptian pound in a direct financial basis is pretty minimal. Of course, the more macro issue is that Egypt is going through a very difficult time. They’re doing all of the right things, but it’s going to be very difficult, and it’s going to be tough on the economy, and we obviously keep a very close eye on that.”

Now Inc 3Q16 Earnings Call Notes

NOW (DNOW) Q3 2016 Results
Robert R. Workman

Completions data would be much more accurate than rig count

“Well, the only reason we use rig count as an indicator for our revenue stream is simply because it’s the only – it’s the least inaccurate data point we can find. If there was solid completions data out there that didn’t vary widely between firms, we would switch to measuring our revenue on a completion basis, because the vast majority of our upstream revenue is with the actual completion of the tank battery, not necessarily the consumables that the drilling rig consumes while they’re drilling. But it’s the only thing we have to measure against unless you have a data source that’s accurate and reliable.

So, generally, you’re going to spend, I don’t know how many days you’re going to spend drilling a six-well or eight-well pad, and we’re going to be selling to the drilling contractor while that’s going on. And then, we’re going to sell very little to the frack crew, maybe some safety gear and some tools, but not anything worth measuring, and that takes a month or two. And then, they do the tank battery. So, there is definitely a lag between our revenue stream and rig count movements. It’s probably one of the more closely tied businesses to rig count movements, but there’s still definitely a lag there.”