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Schlumberger CEO Paal Kibsgaard pessimistic on underlying industry performance

During the second quarter conference call for the world’s largest oilfield service provider, Schlumberger (ticker: SLB) CEO Paal Kibsgaard said that oil markets had found bottom, but that the road to recovery could be long and daunting.

Problems remain within the industry, Kibsgaard said, and the downturn has not created long-term change to fix them.

“For some time, there has been a growing shortfall of both profits and cash flow from many oil producers around the world as the cost of developing increasingly complex oil resources has outgrown the value created which can be seen even when oil prices were at $100 per barrel,” said SLB’s CEO. “The dramatic restructuring of the supply side we are currently experiencing has just accelerated and amplified the cost, quality and efficiency problems of the industry and led to a more acute cash and profitability crisis.”

Operators have tackled the problems brought on by lower oil prices by reducing their activity and looking for pricing cuts throughout the supply chain. “Adding up all of this,” explained Kibsgaard, “the current cost per barrel for oil producers now appears to be significantly lower than what was the case seven quarters ago. However, this should not be confused with a permanent improvement in the underlying industry performance after it has been little to no fundamental change in technology quality or efficiency, no major step change in the industry collaboration and no general transformation of the industry business model.

“What has taken place over the past 21 months is instead a redistribution of the profit in cash flow shortfall from previously sifting mostly with the oil producers to now representing an unsustainable burden for the supplier industry even after a massive reduction of costs and capacity,” he said.

Weakness on the supply side will continue to create problems for producers, further tightening supply and demand, but the underlying weakness in the market Kibsgaard points out requires something more to improve.

“Historically we believe that the chronic shortfall in profits and cash flow throughout the oil industry value chain can only be permanently addressed by a dramatic step change in industry performance,” explained Kibsgaard. “This has to begin with the transformation of the intrinsic quality and efficiency of each industry player but it also require the design of much broader technology systems including both innovative hardware as well as high-level software control systems.”

Schlumberger positioned to succeed in the changing market

Though his outlook on the overall market was pessimistic, Kibsgaard was characteristic of a CEO in believing that his company is prepared to succeed as the market tightens.

Schlumberger has $11 billion in cash and short-term investments  and is generating positive free cash flow, giving it a strong balance sheet relative to other oilfield service companies. Schlumberger has a debt-to-market cap of 19% compared to an oilfield service median of 50% on EnerCom’s OilService Weekly.

Kibsgaard also believes that the acquisition of smaller technology companies, and the $14.8 billion acquisition of Cameron, give Schlumberger “an unprecedented global technology offering.” These companies also give Schlumberger access to develop integrated technology systems to better serve customers.

“We believe that the future industry winners will be the companies that can more effectively integrate the entire industry value chain through an open and collaborative business model with much better commercial alignment between the key contributing parties,” said Kibsgaard.

Cameron integration ahead of schedule

Also on the company’s conference call today was Scott Rowe, president of Cameron Group. Along with his overview of the company’s performance during the second quarter, Rowe gave an update on the integration of Cameron with Schlumberger, saying “in the second quarter, we booked $125 million of synergy-related business, which was significantly ahead of our original plan. We are also on track to deliver the $300 million of synergies in the first 12 months from closing.”

SLB and Cameron can enjoy the synergies they are able to develop as a combined company. This was not the case earlier in the year when Halliburton’s merger with Baker Hughes Industries came to a halt, leaving Halliburton with a $3.5 billion termination fee.

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