National Oilwell Varco 2Q17 Earnings Call Notes

Clay C. Williams – National Oilwell Varco, Inc.

Seeing a resumption of demand in pressure pumping

“The good thing for us is that over 900 rigs running in North America – or in the U.S. right now are consuming a lot of that at a much higher rate than the 350 or so that we bottomed out at last year. And so the rate of consumption has stepped up and that means they have less opportunities to cannibalize inventories and consumables of off idled rigs and have burned through inventories. And so we’re starting to see a resumption of demand.”

Glimmers of hope in international markets

“. We saw some glimmers of hope in the international markets. As two-and-a-half plus years of this downturn have gone on, the stuff that we’ve had out in the marketplace is slowly getting consumed. Those inventories are diminished and depleted and folks have to step back to the table and start ordering more of our products, even at very low activity rates. So we’re seeing some positive signs that give us some optimism in some sustainability of those businesses even in a flattening rig count environment.”

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.”

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”

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.”

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.”

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.

National Oilwell Varco 3Q16 Earnings Call Notes

National Oilwell Varco (NOV) Q3 2016 Results
Clay C. Williams

OPEC producing near maximum levels

“The 2.2 million barrel per day decline in non-OPEC production since 2014 has been fully offset by rising OPEC production which achieved record levels this summer along with Russian production which achieved record levels in September. Overall, we believe OPEC to be producing at near maximum levels with little remaining excess capacity cushion which has delayed the inevitable rebalancing of the world oil markets.”

OPEC faces rising challenges to grow production further

“Nevertheless, time is on our side as OPEC faces rising challenges to grow production further and as dwindling oil field expenditures accelerate production declines through the rest of the world. Faced with extraordinary revenue declines and significant price discounting in all areas of our business, we’ve aggressively reduced costs and improved efficiency, enabling NOV to manage EBITDA decremental leverage to only 28% since the end of 2014.”

Seeing a shift in mix away from offshore but more optimism in onshore

“we are seeing a shift in our mix away from offshore, which really dominated our order book for the last decade plus, to land in 2017, 2018. And as we mention in our remarks, I think cause for some optimism there. Conversations are beginning. Tenders for land equipment are starting to be let. And it’s very early days, but that’s certainly a good and welcome relief. And that showed up in our orders in the third quarter, which grew off of some pretty low levels of orders in the preceding quarter.”

International headwinds offsetting US

‘Well, we expect U.S. to grow. What I would tell you, though, is we are continuing to suffer from international headwinds in certain markets. So international will partly offset U.S. growth. But the big move sequentially is going to be drillpipe sales and then the coating of drillpipe within our Tuboscope unit.”

Plenty of inventory, scarcest resource in an upturn is people

“With regards to your inventory comment, what I would tell you is that, frankly, our inventory is – we still have too much. And so we have ample inventory, I think to respond to our customers’ needs. And so that’s not really the issue. What the upturn will look like, the scarcest resource in every upturn pretty quickly becomes people. ”