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Recent Company Earnings:

October 21, 2016

But expect rising service costs and stricter return hurdles

Paal Kibsgaard, CEO of the world’s largest oilfield service provider Schlumberger (ticker: SLB), gave his assessment of the global oil and oil services markets during the company’s third quarter conference call.

“The business environment stabilized as expected in the third quarter, confirming that we have indeed reached the bottom the cycle. The current period of oversupply and inventory build is over and market sentiments should soon change, paving the way for an increase in oil prices,” said Kibsgaard.

Global Market Balanced, non-OPEC Production Expected to Flatten

Current global supply and demand of crude was described as “more or less balanced as evidenced by flattening petroleum inventory levels and the start of consistent draws towards the end of the quarter – particularly in North America.” Further draws are expected on the basis of upward revisions to 2017 oil demand and OPEC’s announced intentions to cut production.

Kibsgaard further commented that “declining non-OPEC production has offset record OPEC production levels” and predicted on that non-OPEC production levels in 2017 to be at best flat, on the basis of current investment levels. Production upside from the U.S., Canada, and Brazil is expected to be offset by declines in the rest of the non-OPEC.

We Have Indeed Reached the Bottom of the Cycle: SLB’s Kibsgaard2017: V-shaped Recovery Unlikely, but Upside Exists in North America, the Middle East, and Russia

Regarding 2017 E&P investment, Kibsgaard commented that “visibility on remains limited” as customers are still in the planning process. A V-shaped recovery in the industry is still seen as “unlikely given the fragile financial state of the industry,” although with the exception of Asia, SLB sees early signs of global improvement. Activity upside in 2017 will be seen in North American land, the Middle East, and Russian markets.

“If we offer capital and expertise, there has to be a return on it”

Despite no material movements on costs during the quarter, higher oil prices have strengthened the basis for pricing recovery discussions with global customers. This process is expected to take some time to work out but is “critical to recover the large pricing concessions made in order to restore investment in technology innovation, system integration, and operation quality and efficiency.”

Stronger fundamentals also necessitate higher rate of return hurdles. “At the bottom we were willing to compromise but coming off the bottom, expectations for returns need to be restored both at the company and among shareholders,” explained Kibsgaard. Company capital and expertise will thus be allocated to contracts and basins “that meet financial return expectations in the same way our customers allocate capital to projects in their portfolios.”

Kibsgaard noted that a large part of SLB’s contracts “did not meet our financial return criteria” and this will serve as the company’s “starting point for reestablishing sustainable customer relationships.”

North America: “We’re not in it for the commodity side of it”

Having successfully pursued international market share for the past 12 to 18 months, Kibsgaard said that the company has shifted its playbook from “holding the fort to going for market share in U.S. land drilling” to pursue opportunities in drilling and completions technologies.

“On the drilling side in North America, we now have a clear path towards profitability in U.S. land, based on the technology uptake we’re seeing linked to these super laterals. We have not yet done that for fracing because at this stage it is highly dilutive to our earnings,” said Kibsgaard.

The “Rig of the Future” program was described as “on track,” with two U.S.-built pilot rigs planned to be put out for operational evaluation in West Texas. Based on current capex and manufacturing plans, a complete version of the rig is expected to be rolled out in large numbers in 2017.

Kibsgaard: “Momentum Shift” in Mexico

The topic of Mexican oil and gas development was also discussed, with Kibsgaard predicting that drilling activity would pick up in 2017. “It might not be dramatic comeback and we won’t be back to 2013 or 2014 levels anytime soon, but I think there is a momentum shift coming in Mexico.”

This prediction was based on reductions in activity which have not been compensated for by investment as industry and Constitutional reforms have progressed. Recent bid rounds for acreage and the first round of deepwater bids in December were also seen as supportive of higher Mexican drilling activity.

Schlumberger’s Q3 2016 earnings release and a recording of the conference call are provided.

August 5, 2016

July 29, 2016

April 21, 2016