Schlumberger Leads Off Q3 Earnings Rush

Kibsgaard: Market is now in balance, look for upward movement in oil prices and growth in E&P investment 

Earnings season is here for Q3, and the oil and gas industry got off to a strong start with Schlumberger (ticker: SLB) reporting today.

Q3 Stats

• Revenue of $7.9 billion increased 6% sequentially
• Pretax operating income of $1.1 billion increased 11% sequentially
• GAAP EPS, including Cameron integration-related charges of $0.03 per share, was $0.39
• EPS, excluding Cameron integration-related charges, was $0.42
• Cash flow from operations was $1.9 billion; free cash flow was $1.1 billion

Schlumberger Leads Off Q3 Earnings Rush

Schlumberger Chairman and CEO Paal Kibsgaard said that the company’s “activity growth in the third quarter was again led by our North America Land GeoMarket, where we continued to gain market share in both hydraulic fracturing and drilling services despite the decelerating rig count growth.

Kibsgaard said the company saw sequential activity growth in Russia, the North Sea, and Asia, while activity in the rest of the world was largely flat compared with the second quarter.

“From a technology standpoint, revenue growth was driven by the Production Group, which increased 15% sequentially from continued share gains in the hydraulic fracturing market in North America land as well as from increased unconventional resources project activity in the Middle East.

“Reservoir Characterization Group revenue increased 1% as strong Wireline activity in Russia and the North Sea was partly offset by lower exploration-related activity for WesternGeco.

“Cameron Group revenue increased 3% driven by higher product sales for Surface Systems in North America land. Drilling Group revenue grew 1% as we remained sold out on PowerDrive Orbit* technology in North America land and completed key Integrated Drilling Services (IDS) projects in Mexico and Iraq that will not resume until early 2018.

“Geographically, North America revenue increased 18% as we continued the high redeployment rate of our spare hydraulic fracturing capacity. North America land revenue grew 23% sequentially, significantly outpacing the 12% increase in rig count, with hydraulic fracturing revenue growing 42%. Over the past six months, we have more than doubled the number of active fracturing fleets in North America land and have now redeployed almost all available capacity.

Outlook for GOM remains ‘bleak’

“In the US Gulf of Mexico, activity continued to weaken in the third quarter, and the outlook remains bleak for this region based on current customer plans.”

Oil market is now in balance

“The reduction in global oil inventories in the third quarter is clearly showing that the oil market is now in balance, which is reflected in the upward movement in oil prices over the past month,” Kibsgaard said.

Kibsgaard said this was supported by the following positive signs:

• First, the investment appetite in North America land now seems to be moderating, driven by a growing focus from E&P companies on financial return and the need to operate within cash flow rather than the pursuit of production growth.
• Second, comments from several of the key OPEC Gulf countries, as well as from Russia, suggest that an extension of the existing production cuts beyond the current nine-month agreement is a possibility.
• Third, investment levels in the production base outside North America land, OPEC Gulf, and Russia all remain at unprecedented low levels, raising the likelihood of a medium-term global supply challenge, and increasing the urgency for higher investment.

Expect further upward movement in oil prices and growth in E&P investment

“A continuation of these market trends, combined with further steady draws in global oil inventories is now creating the required foundation for further upward movement in oil prices and subsequent growth in global E&P investment.

“And while there is still some level of uncertainty around the exact timing of this industry recovery, we see a number of market factors and data points now emerging that make us increasingly positive and optimistic about the outlook for our global business. It is also worth noting that the geopolitical risk premium on the oil price, which was quite significant in the past, has been replaced in many ways today by an oversupply discount. Given the visible tightening of the supply and demand balance and the current geopolitical tensions in many of the world’s key oil producing regions, a geopolitical risk premium may again become a significant factor,” the CEO of the largest oilfield service company said.

From the SLB Q3 2017 conference call Q&A

During the earnings call Q&A, Kibsgaard was asked about performance based drilling contracts.

Paal Kibsgaard: Obviously, performance-based drilling contracts has been established on land for quite a long time. And we see that the next, I would say, area that this will start to grow in is in shallow water. If you want to drill performance-based, you need to have a pretty good handle on the subsurface and the drilling rigs. And given the drilling activity that you’ve had historically on shallow water, this is, again, why we see this as the next horizon that these – the contracts will take on. So in terms of customers, we have a range of customers who are already pursuing performance drilling contracts offshore on shallow water.

The main thing is that these contracts traditionally has not included the rig. So what we’re seeing now is several customers are trying to bring the rig into play and our rationale for investing in Borr is generally to get closer to one of the rig providers to try to drive this new behavior and establish performance contracts including the rig.

Now our relationship with Borr does not preclude us from having similar relationships with all the other jack-up providers and we have engagement and discussions with several of them to do exactly the same there.

So I would say it’s a growing interest from the customer base. We have several key customers who are already well advanced in trying to establish this. And the main thing is that we need the directional drilling company and all the other well construction services related on the rig, together with the rig provider to come together and establish a contracting framework that is benefiting all parties involved. And I think that’s what we are trying to drive through our initial investment in Borr.

Q: It does break with the traditional way of contracting, very much so. To what extent customers are really opening up to that type of debate.

Paal Kibsgaard: Yes. I think it’s fair to say that several key customers, I think, are happy to never see rig day rates again. If they can get the entire drilling package, including downhole and surface onto performance-based, I think that would be a benefit both for the customer and for the service companies involved.

Q: We’ve been asked this by a couple of investors. Does the latest Canadian SPM investment in terms of what you’ve done and what you’re talking about doing, does that diminish the likelihood or magnitude of buybacks or dividend increases going forward?

Paal Kibsgaard: Well, I would say on the way we have always planned to use our cash, the priority has always been to reinvest into the business, into projects and activities that are driving earnings and that are accretive to our returns. Beyond that, we’ve said that we will review dividends on an annual basis and the balancing factor will always be buybacks. Nothing has changed to this effect and we will review dividends in January and we will continue to be in the market to buy back stock. But we won’t buy back stock at the expense of not being able to do what we think is right in terms of driving the growth of the underlying business.

Simon Ayat, SLB: Let me add one thing about the Canadian project. The maximum cash exposure that we have announced, which is basically the amount we’re going to pay upfront, it is a maximum cash exposure. Any future investment in the project will be mitigated by the cash flow that we will generate from the production of the project itself. So just to make it clear, the future investment in Torxen will be basically self-sufficient from the production that we’re going to generate from the project itself.

Q: Following up on Bill and Scott’s question around SPM, when we think about SPM, kind of in U.S. onshore, do you – are you trying to take advantage of excess service capacity or is it more about kind of better penetration of technology? And if it’s the latter, what technology do you think you’re able to exploit through SPM that you’re not through your traditional businesses?

Paal Kibsgaard: I would say in U.S. land, it’s generally looking to basically demonstrate what our technology and capability sets can generate, right? So this is all the way from well placement, drilling efficiency, frac placements and also overall how we complete these wells. So most of these things we have generally talked to all our customers about already. The main thing is the ability to put this together into consistently delivering top quartile wells, which, I think we’ve demonstrated through the example that Patrick described today with SM Energy. So we’re just looking to do more of that. And that could be in the form of SPM. But like I said earlier, it could be in any form of whatever contractual engagement our customers are looking for.