Positive Reception in a Negative OilService Environment
The effects of reduced drilling activity were apparent in Schlumberger’s (ticker: SLB) Q1’15 revenues, but the oilservice giant still managed to report net income (excluding charges and credits) of $1,358 million, or $1.06 per share, in the three months ended March 31, 2015.
The net income for Q1’15 represented respective declines of 30% and 15% compared to Q4’14 and Q1’14. North America pretax operating income was down by 51% and 39% in the same periods. SLB management attributed the declines directly to the slowdown in the drilling and exploration market. United States rig counts on the day of the release were at 954 – nearly half of the figure from April 2014.
North America and international sources of revenue declined 25% and 16%, respectively, compared to the Q4’14, the immediately preceding quarter. SLB said approximately 75% of the revenue slide was due to decreased drilling and exploration activity, with the remainder being lost in the exchange rate. On a sequential basis, Q1’15 revenues of $10,248 million were down 19% from Q4’14’s total of $12,641 million.
The numbers beat several analyst estimates who had relatively low expectations in such a difficult environment. “Overall, this was a very strong quarter by Schlumberger as the company demonstrated better-than-expected operating margins across each region due to operational flexibility and cost control,” said a note from Raymond James, while Capital One Securities said SLB achieved a “positive number on low expectations.”
The company plans on spending $2.5 billion in 2015 operations, down from 2014’s total of $4.0 billion. The reduced activity led to the cut of an additional 11,000 jobs in the company. Approximately 15% of its workforce has been cut since the commodity crash.
The North America Situation
In a press release covering the announcement, SLB attributed the North America slide to “the sharp drop in land rig count and the early onset of the Canadian spring break-up.” Offshore activity in the Gulf of Mexico was flat.
SLB served as a lifeline for many of its customers attempting to reduce service fees and maximize hydrocarbon recovery, and the oilservice major continued its innovation by deploying the BroadBand Sequence fracturing services in various shale plays.
BroadBand is SLB’s latest state-of-the-art reservoir completion service, and its success stories include increasing performance of two Haynesville wells to a combined 6.75 million standard cubic feet per day (MMscf/d) from 0.51 MMscf/d. Likewise, using BroadBand, an Eagle Ford well increased its oil and gas production by 120% and 89%, respectively, for the first 45 days after refracturing.
The International Situation
Schlumberger was hardest hit in the Latin America region due to lower activity in Mexico and a low exchange rate in Venezuela (192 Bolivares to each US dollar, compared to a previous exchange rate of 50 Bolivares), contributing to a 20% revenue decline in Q1’15 from Q4’14. Europe/Africa revenue dipped by 17% in the same time frame due to Russian ruble devaluation and typical seasonality, and SLB’s work in Libya now consists solely of offshore operations. The Middle East and Asia revenues declined the least of any section at 13% in the quarter-over-quarter comparison, with India GeoMarket revenue growing sequentially.
Schlumberger has split its specialties into three segments: drilling, reservoir characterization and production. Paal Kibsgaard, President and Chief Executive Officer of Schlumberger, broke down the segments in the earnings call.
“Among the Technologies, Production Group revenue declined 22% [in Q1’15 from sequential prior quarter, Q4’14] from lower pressure pumping services in North America, while Reservoir Characterization and Drilling Group revenues fell by 21% and 15% respectively on a sharp decrease in exploration-related services and development drilling activity. Product, software and multiclient sales also declined as customers further curtailed exploration and discretionary spending.”
Despite the significant revenue reductions, the totals were still above the expectations set forth by several analyst firms, including Capital One Securities. The higher than expected numbers, however, are expected to come at the expense of its smaller rivals. “We wouldn’t expect this to be a leading indicator for the rest of the oil service sector (except maybe HAL),” the Capital One note said.
Raymond James echoed that sentiment, implying that SLB’s market share has likely increased. “Specifically, either Schlumberger’s pricing declines are significantly less than expected or the company’s activity held up materially better than the average services company,” said the note. “We do not view the company’s strong beat as a barometer for 1Q15 oil service earnings. In fact, one could argue that given Schlumberger’s implied market share gains in North America this could be a poor indicator for other service names.”
SLB bought back 8.7 million shares in the quarter for a total purchase price of $719 million. Its debt-to-market-cap percentage was only 11% in EnerCom’s latest Oilservice Weekly Benchmarking Report, compared to a median of 28%. Its operating profit percentage of 16% is more than double the industry median of 7%.
Oil market bulls were given reason for optimism in Kibsgaard’s forecast. The SLB CEO said: “Looking at the macro environment, the global economy continues its steady recovery, and oil demand is still expected to increase by 1 million bbl/d in 2015. However, the significant reductions in E&P spend are starting to impact supply in both North America and internationally, and supply is expected to tighten further in the second half of the year.”
North American E&P investment for 2015 is expected to be more than 30% lower than 2014 levels, while international spending will be down by about 15%. Headwinds are expected in both markets but will be “considerably less” than those in the North American markets. “We believe that a recovery in U.S. land drilling activity will be pushed out in time, as the inventory of uncompleted wells builds and as the re-fracturing market expands,” Kibsgaard elaborated. “We also anticipate that a recovery in activity will fall well short of reaching previous levels, hence extending the period of [service] pricing weakness.”
The revenue guidance for North America “seems optimistic,” according to a note from Global Hunter Securities, considering rig counts are down 44% year-to-date on average. “International revenue guidance of down 15% implies no material weakening in international revenues overall from Q1, with weakness in most areas offset by strength in the Middle East and stability in Russia,” the note said.
Raymond James does not expect the re-frac market to change in the near-term, saying the firm has “brought the refrac discussion up with various producers and have consistently been told that it will not be a priority.” The difficulty of the procedure has many E&Ps allocating their capital to other projects. “Refracs may have their place in the future, but we do not see any significant shift on the horizon,” the note concluded.
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