Schlumberger’s $7.4B loss sets stage for ‘most uncertain’ future

Chron

Schlumberger, the largest oil field service company, said Friday it lost $7.4 billion in the first quarter. Then its CEO said the second quarter will be worse.

The company attributed the loss to writing down the value of assets by $8.5 billion because of oil prices at 20-year lows and the collapse of demand created by shutdown orders during the coronavirus pandemic.

In response, Schlumberger during the quarter laid off 1,500 people in North America, cut executive pay and put most of its remaining employees on furloughs. The company also slashed its dividend by 75 percent, paying 12.5 cents compared with its previous payout of 50 cents. Yet CEO Olivier Le Peuch said the second quarter will be the “most uncertain and disruptive quarter that the industry has ever seen.”

(left) Schlumberger’s drilling operator Adrian Gabriel (cq) is directly in charge of drilling operation on the Genesis Drilling Test Facility where other employees train with a real life size drilling simulator which was commissioned in 1986 at company’s U.S. headquarters in Sugar Land and continues to train on Wednesday, September 27, 2006. Schlumberger is the world’s largest oilfield services company and has had a local presence since the 1930s; it recently consolidated its New York offices in Houston. Schlumberger is coming off a record quarter and anticipates solid financial growth as profit-rich oil companies invest more in exploration. Photo by Mayra Beltran / Houston Chronicle

Although OPEC, its allies and other oil-producing nations agreed this month to cut global oil production by 10 million barrels a day, the pandemic is reducing global demand by at least double that amount, according to some estimates. As a result, Schlumberger isn’t offering specific guidance to investors on the company’s second-quarter financial performance.

“First, it is very difficult to model or predict the frequency or magnitude of the COVID-19 disruption on field operations,” Le Peuch said. “Second, it is too early to judge the impact of the recent OPEC+ decision on the level of international activity as well as its repercussion on storage levels globally and related risks of production shut-ins.”

Still, the company appears to be taking steps to prepare. The dividend reduction saves the company an estimated $500 million per quarter, which it will use to pay down about $2 billion of debt due over three years, said Vebs Vaishnav, an analyst with the investment arm of Scotiabank. The company, he said, also stands to save $25 million a quarter from first-quarter layoffs.

Schlumberger, one of the first publicly traded energy companies to report quarterly earnings, sets the tone for the industry and in particular the oil field service sector, which includes drilling rig operators, equipment manufacturers and hydraulic fracturing crews.

Houston oil field service company Halliburton reports earnings Monday, and competitors TechnipFMC and Baker Hughes will report Wednesday, but there are already signs of strain.

On top of budget cuts and other cost-reducing measures, Halliburton and Baker Hughes were among nearly a dozen oil field service companies that have confirmed laying off a combined 8,700 people in Texas, Oklahoma, Colorado and other locations during the first two weeks of April.

Meanwhile, TechnipFMC is postponing plans to split into two companies until economic conditions improve. But that could be a while, as exploration and production companies slash drilling and completion budgets. The number of active drilling rigs in the United States fell by 73 to 529, according to data released Friday by Baker Hughes, a level not seen since the most recent oil bust four years ago.

Among the biggest challenges facing oil field service companies are the “frac holidays,” temporary halts to shale drilling, that exploration and production companies are taking during the second quarter, said Byron Pope, who analyzes the oil field service sector for Houston investment bank Tudor, Pickering, Holt & Co.

Producers typically slow down or take a break from hydraulic fracturing from Thanksgiving until a few days after New Year’s Day. But taking such a break during the second quarter, Pope said, is unusual and speaks to the unprecedented nature of the current oil downturn.

“We have never seen a quarter like this in terms of a cliffdive or a nosedive in terms of completions activity sequentially like we’re looking at during this quarter,” Pope said. “You’d probably have to go back to the mid-1980s to find a decent comparison.”

Oil prices collapsed in 1986 to about $10, creating a colossal bust burned into the memories of those in the industry. In Houston, 225,000 people lost their jobs during that crash as office vacancies jumped above 20 percent and thousands of homes were lost in foreclosures.

Houston oil giant ConocoPhillips, one of the top 10 drillers in Texas, has said it will take a frac holiday. The company said it intends to keep four drilling rigs operating in the Eagle Ford Shale of South Texas, two in the Bakken Shale of North Dakota and one in the Permian Basin of West Texas, but suspend the work of its five fracking crews.

“The frac phase of a well typically costs twice that of drilling yet it only takes half the time,” Fox said. “Stopping completions while continuing some drilling was the most rational thing to do.”

There are glimmers of hope for the oil field service companies in Schlumberger’s earnings. Guyana, Qatar, Australia and Russia will offer long-term natural gas development projects both onshore and offshore, the company said.

And while some in the industry fear that the number of hydraulic fracturing crews in U.S. shale plays could fall below 100, Le Peuch pushed back against those predictions.

“We don’t believe this will be the case, at least to what we see and the indication we have,” Le Peuch said. “We are aiming to maintain 10 to 15 or 10 to 12 fleet as a minimum operating in that environment.”

sergio.chapa@chron.com