Core Labs (CLB) Q2 2016 Earnings Call

Core Labs (CLB) CEO David Demshur said oil market supply and demand will come into balance later this year

“Core believes that worldwide crude oil supply and demand markets are close to balancing and will balance the second half of 2016. On the crude oil supply side, U.S. unconventional production peaked at 5.5 million barrels of oil per day in March of 2015, and has since fallen by over a million barrels a day owing to high decline curve rates associated with these tight oil reservoirs. Offsetting these sharp production declines have been additions of approximately 160,000 barrels a day from several deep water Gulf of Mexico legacy projects that were commissioned several years ago and started to bear fruit in late 2015-2016. These additions no way will offset what’s coming from the deductions that will occur on land throughout this year and into 2017.”

Core Labs (CLB) CEO David Demshur reminded investors of the immutable law of physics and thermodynamics

“Globally, Core estimates that the net crude oil production decline curve rate has expanded to 3.3% net, up some 20 basis points from earlier year estimates. Applying the 3.3% net decline curve rate to a worldwide crude oil production base of approximately 85 million barrels per day means the planet will need to produce an approximately 2.8 million new barrels by this date next year to maintain current worldwide productive capacity totals. With the long-term worldwide spare capacity nearing zero, Core believes worldwide producers will not be able to offset these declines, and the estimated 3.3% net production decline curve rate in 2016 will lead to falling global production in 2016. This is supported by some of the recent IEA data indicating declining production on a global basis through Q2 2016. Therefore, Core believes crude markets more than rationalize in the second half of 2016 and price stability, followed by price increases, some occurring as we speak return to the energy complex. Remember, the immutable laws of physics and thermodynamics mean that crude oil production curve always wins and it never sleeps.”

Demand for oil is strong

“On the demand side, if we look at the crude oil market, the IEA has increased demand in 2016 to approximately 1.4 million barrels of oil per day. The U.S. is now using over 10 million barrels per day of gasoline. These are near record levels. Recent Chinese export coupled with strong demand out of India are at near all-time highs. Supply and demand will balance as they have in all past market disruptions.”

Haliburton (HAL) Q2 2016 Earnings

Haliburton (HAL) CEO David Lesar said the business continued to experience pricing pressure

“Our second quarter results showed resilience in the face of another challenging quarter marked by lower activity levels and continued pricing pressure around the globe.”

But they believe the market has bottomed

“We believe the North America market has turned. We expect to see a modest uptick in rig count during the second half of the year. With our growth in market share during the downturn, we believe we are best-positioned to benefit from any recovery, including a modest one. Internationally, we are maintaining our service footprint, managing costs and continuing to gain market share.”

North America rig count has started to improve which they hope will help their business

“North America revenue declined 15% sequentially, significantly outperforming the average US rig count, which was down 23%. After falling 78% from the November 2014 peak, the US rig count reached a landing point during the second quarter, as we predicted during our last earnings call. Since reaching the bottom, the rig count has improved by 26 over the last several weeks, reflecting operator confidence in stabilizing commodity prices.”

Customer base of oil companies are thinking about growth again

“Today our customers are thinking about growing their business again rather than being focused on survival. There are 2 distinct factors at work in North America; psychological and economic and I think it’s critical to understand them both.  I spent a large amount of time with customers late in the quarter taking their pulse and I can tell you there was a growing survivor mentality out there, and you can’t underestimate the positive change in attitude that we’re seeing in our North American customers. There is a spring in their step that I didn’t see earlier in the year and in almost every case, they are talking about adding rigs, buying assets or doing something value accretive. In short they are getting back to business.”

Rig activity in Latin America is at multi-decade lows

“In Latin America, revenue declined 12% sequentially, relative to a rig count decrease of 18% from the first quarter average. Looking at our major countries, rig activity in both Brazil and Mexico is at 20-year lows, while Venezuela continues to experience significant political and economic turmoil.”

Not changing their strategy as they prepare for the recovery in their business

“As we prepare for the upcycle, our approach to the market remains unchanged. We remain focused on consistent execution, generating superior financial performance, and providing industry-leading shareholder return.”

Haliburton (HAL) President Jeff Miller said they’ve been keeping equipment operating even though its unprofitable

“Despite absorbing the pain of pricing reaching unsustainable levels, we made a strategic decision to stay in every market and keep crews running. In spite of the nearly 80% decline in rig count, our stage count only declined 33%. So here’s what we’re doing now. We preserved idle equipment outside of our field locations so it doesn’t get cannibalized. It’s clear to me that it will be cheaper to reactivate our cold stacked equipment than to put capital into cannibalized horsepower. This means we are best positioned to more quickly get back to work in the market recovery and are prepared to activate equipment when we see economic opportunities to do so.”

Haliburton (HAL) President Jeff Miller summarized their alleged competitive advantage

“Our competitive advantage is this. We collaborate, engineer solutions and execute to maximize our client’s asset value, which means a lower cost and making more barrels. This is why we maintain our global service footprint. We will own the last mile, be present across the globe and maintain dead focus on service quality.”

Haliburton (HAL) CFO Marc McCollum seeing some cost inflation 

“One of the things that we’re already beginning to see in the marketplace is a little bit of cost inflation. Diesel, we’re seeing it in some commodities and things. And so we’re already, believe it or not, at this point beginning to fight inflation.”

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.”

 

 

Source: http://www.slb.com/news/presentations/2016/2016_0621_schorn_wells_fargo.aspx

Total Energy (TOTZF) Q1 2016 Earnings

Total Energy (TOTZF) CEO Daniel Haylk characterized the oil services market as “dysfunctional”  

“ur first quarter results reflect what is arguably the most difficult industry environment faced by Total Energy since we commenced our operations in 1997. The decline in North American oil and natural gas, drilling and completion activity that began in 2014 accelerated during the first three months of 2016, define the Canadian seasonal upswing in oil field activity that typically occurs during the winter months.  This difficult environment is led to what we have characterized as a dysfunctional market in certain of Total’s business lines. Evidence supporting our characterization includes unsustainable pricing, cannibalization of equipment and willingness to take excessive counterparty credit risks, which in turn is leading to business failures.”

Expects bankruptcies of some of their competitors

“With no clear and substantial improvement industry conditions in near sight, we fully expect business failures in our industry to accelerate over the next few months. In such circumstances, Total Energy has elected to remain disciplined, so as to preserve its equipment base, minimize operating losses and protect its financial strength and flexibility.”

Total Energy (TOTZF) CFO Yuliya Gorbach said revenues contracted substantially from last year

“Consolidated revenues for the first quarter of 2016 were $50 million, a 46% decrease from the first quarter of 2015.  Revenue per spud to release operating day in our contract drilling division during the first quarter was $16,260, an 18% decrease from the $19,888 per day realized during 2015. Decreased day-rate pricing was the primary reason for the decrease.”

Experienced price erosion of their services

“Within the rental and transportation services division, severe price competition resulted in significant declines in equipment utilization and divisional revenue. First quarter rental equipment utilization decreased 61% to 15% in 2016 compared to 38% in 2015.

Despite reducing costs, still not profitable

“Despite ongoing effort to reduce operating cost, a significant fixed cost structure of this division contributed to the fact that for the first time ever this division was not profitable during the first quarter, which is typically its busiest quarter.”

Seacor (CKH) 2015 Annual Report

Source: Seacor Annual Report 2015
 
Seacor (CKH) CEO Charles Fabrikant says the oil industry is still hungover from excess capacity from the days of $100 oil

I am not prepared, nor am I qualified, to opine as to whether 

the oil price has stabilized, or whether it has another leg down 
and will “test” or pierce the low “tick,” $26.21, recorded in 
February 2016. There is no shortage of opinions as can be 
seen on the cover of this report. The history of forecasting the 
price of oil is littered with articles and headlines trumpeting 
contradictory opinions and incorrect predictions. Choosing the right guru is not easy.

As previously noted, this offshore typhoon was not unexpected. 
A meaningful downturn seemed likely to spawn a welcomed 
opportunity to benefit from our conservative balance sheet. I 
should have kept in mind the adage, “Be careful what you wish 
for, you may get it!” History does repeat. With apologies for 
repeating last year’s letter, today’s depression in the offshore 
marine sector conjures up 1985–1987, the dreariest years of 
the lost decade, 1985–1995. (OPEC’s bickering reminds me of 
the 1974–1977 years.) There are too many shipyards, too many 
operators, too many vessels, and too much debt, the hangover 
from $100 oil and irrational exuberance. There would in all 
likelihood have been considerable excess capacity plaguing 
most of the offshore vessel business even if the price of oil 
were to have remained at a more “respectable” level. Vessels 
(and drilling rigs) now compete for scraps of work. Most are 
living on a subsistence diet. Consolidation of operators and 
equipment is almost certainly inevitable. The question is: 
How much pain will precede it; how long will it take to work 
through the reorganizations? Cancellation of orders for new 
equipment is also almost certain.”
Hoping consolidation improves the excess capacity problem

Based on our experience from 1989–2005, consolidation should lead to improved margins.

Seacor (CKH) CEO Charles Fabrikant says competitors are acting irrationally

“The competition in some regions for jobs has become so keen
that some operators are willing to take multi-year contracts
at day rates that appear, to us, to be below actual running
costs, particularly when factoring in surveys that will have
to be undertaken during the contract term. Our focus is on
cash, but we will not scrounge for business at marginal rates
and take jobs requiring us to offer options that could forego
dollars in the future for pennies today. (Nickels and dimes are
a different story.)”

 

Core Labs (CLB) 2015 Annual Report

The company had a tough year as energy prices fell substantially and customers decreased drilling activity 

“Core Laboratories had a challenging year in 2015 as crude oil and natural gas prices reached multi-year lows. Sharply higher crude oil production for the fifth consecutive year, primarily from unconventional reservoirs in the United States, and increases in production from Russia and several OPEC countries led to a worldwide imbalance, with crude oil supply outstripping increasing demand. The lower-priced energy commodity complex caused Core’s clients, the worldwide oil and natural gas companies, to significantly reduce their operating activities. The North American rig count in 2015 fell over 60%, while international activity levels fell approximately 15%.”

Core Labs says their industry is saddled with overcapacity of equipment

“Core’s Board believes that stock price performance over time is directly related to ROIC.   Note that most oil field service companies have ROICs below their Weighted Average Cost of Capital (WACC), a product of overinvestment in their company or vast overpayment for perceived growth via acquisitions. Past overinvestments and overpay- ments for acquisitions for hundreds of millions of dollars are evident today in the oilfield services industry. Several companies are faced with massive write-downs of asset values and write-offs of acquired entities, thereby destroying capital and shareholder value.”

Significantly reducing their expense base so that they are more efficient

“Core Laboratories faced a challenging year in 2015 as supply and demand imbalances in the energy complex led to lower crude oil and natural gas prices worldwide. These lower prices precipitated activity cut-backs from Core’s oil company clients. Core’s management reacted, lowering the Company’s cost basis by investing in greater global automation of services, increasing multi-skilling programs, and, unfortunately, reducing staff.  The lower industry activity levels will lead to lower future supply. The balancing of worldwide crude oil markets is already well underway, as evidenced by the continued sharp decline in U.S. land production during the second half 9,500 of 2015.

Their technology is critical to helping their customers improve oil recovery

“Today, on average, the world’s oilfields produce only about 40% of their reserves, leaving 60% of the oil in place. Core Lab’s innovative technolo- gies help to optimize production and recovery of hydrocarbons; and they can, in some cases, elevate production to 45% or more of the hydrocarbon reserves.”

 

DistributionNOW (DNOW) Q1 2016 Earnings Call

DistributionNOW (DNOW) CEO Robert Workman said oil storage capacity is nearly tapped out

“The first quarter of 2016 proved to be as challenging as the many preceding quarters with the U.S. and Canada rig count dropping 23% sequentially and 57% versus the year ago period. While production in the U.S. peaked several months ago, oil storage is proving quite stubborn and is rivaling levels from over 80 years ago. Until production declines translate into meaningful oil inventory storage reductions in the U.S., I believe we will continue to operate in a challenging upstream environment.”

Couldn’t imagine the industry operating under more distressed circumstances

“Without question, today’s operating environment is the most challenging any of our teams have experienced. Even though some of our largest revenue streams are being negatively impacted like never before, in part due to wells being drilled but not completed whereby tank batteries or hook ups are not being constructed.”

Have cut 30% of their workforce since the beginning of the energy downturn

“Total head count was reduced by approximately 425 during the first quarter of 2016, 65 of whom were from companies we’ve acquired since becoming a standalone public company. Excluding acquisitions, by the end of Q1, 2016 we’ve reduced head count by about 1,650 or approximately 30% of the workforce since the late 2014 peak”

Steel, which is used in many of their products, has been rising of late

“We’ve seen an uptick in steel prices that started in February and has continued through April, driven by a rise in iron ore, scrap and the Chinese steel market. Iron ore has risen back to the levels last seen in mid-2015 and scrap has almost doubled in price since early March. This has caused a spike in the hot-rolled coil price, supported by the favorable preliminary determination of a dumping suit filed in the USA for hot-rolled coil.”

Offshore drilling contractors continue to idle rigs

“On earrings calls in the last few weeks, several offshore drilling contractors have announced more scrapping and stacking of rigs, which will in turn add more surplus inventory to the market to be redeployed and cannibalized across their operating fleets. While all of these actions further challenge our operating environment, they also set the stage for higher demand for our products and services when the market corrects. When customers increase activity, the amount of product they’ll need to restock operator warehouses and rigs and the pipe, valves and fittings required to complete wells will benefit DNOW exceptionally well since we will be at the front edge of the recovery just as we were in the decline.”

DistributionNOW (DNOW) CEO Robert Workman thinks the best use of their cash is acquisitions as opposed to share buybacks or retiring debt

“We continue to see the best use of our cash and line of credit to be investing in high-value-add acquisitions that expand the products, services and geographies that allow DNOW to differentiate ourselves in our market.  We do have other deals in the pipeline that we’re reviewing but we’re continuing to watch the market and be fiscally conservative.”

DistributionNOW (DNOW) Chief Accounting Officer David Cherechinsky said their customers are distressed

“What we’re seeing is our customers being more stressed financially, as you would expect. And customers are demanding longer terms and some simply can’t pay their bills, so we’re seeing an uptick in that expense. Again, as the market bottoms and that we see some recovery, hopefully that will abate but that would be sequential increase.”

DistributionNOW (DNOW) CEO Robert Workman thinks oil producers will start adding back rigs when oil gets to the $50-$65 range

“I read all of our customers’ reports and they tell us all the same thing publicly, but I haven’t seen anyone say they’re going to pick up rigs at less than $50. And some are saying, they won’t pick up rigs until we get to $65. So in the $50 to $65 range if it’s sustainable, I think you’re going to see people start adding back rigs.”

Total Energy Services (TOTZF) Q4 2015 Earnings Call Transcript

Total Energy Services (TOTZF) CEO Daniel Haylk said some of his competitors are acting irrationally

“Current industry conditions are as difficult as any faced by Total Energy since we commenced operations in 1997. Price competition has been fierce with some competitors literally offering certain of their equipment and service for free in order to secure what little work there is. We cannot and will not compete with free.”

They’re thinking very carefully about who they do business with

“We have remained diligent in the management of counterparty credit risks. Our refusal to pursue unprofitable work and recklessly extend trade credit has undoubtedly had a negative impact on near term equipment utilization and revenue. On the other hand, our bad debt expense has been minimal and our equipment fleet is and will be in a good state of repair and ready to resume normal and profitable operations in short order with relatively little start up costs.

They are turning down business in some cases where they are concerned about whether they will get paid.  

“We’ve turned down work where we’ve not been willing to accept the credit risk.  The worst thing than not getting a job is getting it and not getting paid.”

Total Energy Services (TOTZF) CEO Daniel Haylk said he takes business phone calls on Saturday’s at 10:00pm

“We have very strict credit controls, I will get phone calls 10 at night on Saturday night as to whether or not we can work for someone. And we will do due diligence, I will do due diligence at 10 at night. Usually someone phoning 10 at night on a Saturday, meeting at for six in the morning the next morning. That’s a big flag. But definitely we’re requiring deposits in some cases. We flat out refuse to work unless payment upfront.”

Total Energy Services (TOTZF) CEO Daniel Haylk said part of their corporate culture is digging in when times get tough

“So first of all, in 19 years we’ve never closed any of our rental transportation branches and we’re not going to now. We’ve had situations in the past where there’s been good discussions with divisional management about shutting the branch down, three years later became our number one branch literally. When we make a commitment to a community, first of all, we don’t open them lightly but once we open them we commit to that community. Now listen, we’ll bring our cost structure down as much as we can. But we stick, we’re not quitters. The easy thing to do is quit and we don’t quit. That said, and listen we bring our cost structure down and then we hunker down and – but that’s intangible assets that’s not on our balance sheet that when activity levels recover and you’ve supported a small community during a pretty rough time they remember who paid their property taxes during the rough times. They remember who supported the community employed the locals. And I can tell you number one, the community defends you. And number two, it’s pretty easy to find people to work for you relatively speaking. And so we take that commitment very serious. And we’ve never shut a branch down and we’ve hunkered down and gone through some pretty tough times. And we’re proud of that.  That’s something that defines our culture.”

Total Energy Services (TOTZF) CFO Yuliya Gorbach said prices for energy operating equipment continue to decrease across the oil patch

“Revenue per spud to release operating day in our contract drilling division during the fourth quarter was $16,405, a 24% decrease from $21,503 per day.”

 

National Oilwell Varco 4Q15 Earnings Call Notes

National Oilwell Varco (NOV) Clay C. Williams on Q4 2015 Results

Present level of activity is insufficient to supply longer term demand

“We believe the present level of activity is insufficient to supply the longer-term demand for oil. And note that unlike the three most recent downturns through the past 20 years, OPEC has not curtailed production to defend pricing. This has made the present downturn far more severe, but will perhaps lead to a sharper eventual recovery.”

The relentless march of depletion will bring supply and demand into balance

“With producers pumping furiously to maximize their cash flow, the relentless march of depletion, the deferral of 68 projects representing 3 million barrels of oil per day of planned future production, and the unfolding of severe capital austerity will help bring supply and demand into balance.’

As the downturn lengthens everybody is becoming more realistic

“we’re actively pursuing several targets now. It has been challenging and sometimes frustrating to reach agreement with potential sellers. But as the downturn lengthens, everybody in this space is becoming a lot more realistic. We remain patient and disciplined on values and realistic in our outlook, as the option value of our capital flexibility steadily rises.”

Flexing up and down sharply is a requisite skill in oil services

“one of the really necessary skill sets in oilfield services for those of us that have been in it a while is the ability to flex up sharply when called upon and flex down sharply when called upon.”

Nobody is really maintaining their fleet very well

“I can tell you the day or wrap numbers around this. But I would tell you anecdotally, nobody is really maintaining their fleets very well. And in fact as I said I think in my comments, there’s a lot of equipment auctions under way where you can pick up fleets at pennies on the dollar. And that becomes a source of spare parts. And that’s how it affects our business. Rather than buying consumables, fluid ends, things from us, those are being purchased at auction.’

We are enthusiastic about what we see out there (M&A)

“We are enthusiastic about what we’re starting to see out there. And again great to have a lot of balance sheet flexibility and capacity. And I think there’s a lot of optionality right now embedded in NOV.”

It’s hard to get the bid and ask to converge on the way down

“I would tell you on the – on down – in down cycles, having been through a few, it’s really hard to get the bid and the ask to converge on the way down.”

Jose A. Bayardo – Chief Financial Officer & Senior Vice President

Core Labs 4Q15 Earnings Call Notes

Core Laboratories NV (CLB) David M. Demshur on Q4 2015 Results

Crude should balance in 2H16

“I’d like to talk about some of our current macro views, and then touch on the three financial tenets. Our Core believes that the worldwide crude oil supply and demand markets will balance in the second half of 2016.”

Decline in unconventional production has been offset by surprise addition of deepwater projects

“On the crude oil supply side, U.S. unconventional production peaked at approximately 5.5 million barrels of oil per day in March of 2015, has since fallen by over 600,000 barrels a day owing to high decline curve rates associated with tight oil reservoirs. Offsetting these sharp production declines have been surprising and unsustainable additions of over 250,000 barrels a day from deepwater Gulf of Mexico projects that were commissioned several year ago and that beared fruit in late 2015. The sharp declines from U.S. land production will continue into 2016 and Core believes these decreases could reach 900,000 barrels a day by the year-end 2016.”

The crude oil production decline curve always wins

“Remember, the immutable laws of physics and thermodynamics mean that the crude oil production decline curve always wins and that it never sleeps.”

IEA is still calling for demand growth despite China

“On the demand side, on the crude oil market, the IEA is still calling for increased demand in 2016 of approximately 1.2 million barrels per day, notwithstanding daily news out of China regarding their economic activity. Supply and demand will balance as they all have in all past market disruptions.”

Spare capacity in the Middle East is near zero

“on the Middle East, we see spare capacity there across the Middle East at a very low amount. Actually long-term spare capacity, we see near zero. You could probably generate another million barrels or 1.5 million barrels on a short-term basis. But on a long-term basis, we would put spare capacity nearing zero.”

Richard L. Bergmark – CFO, Member-Supervisory Board & EVP

Better valuations don’t make bad companies into good ones

“Rob, one thing about down cycles is better valuations do not make bad companies into good companies. So, our perspective is we haven’t seen good companies to acquire that fit our three segments. So, this recent change in valuation really hasn’t changed that. So, we don’t see acquisitions really adding to this at this moment.