Schlumberger’s Write-Downs, Layoffs Indicate Tough Year Ahead

Schlumberger (NYSE:SLB), the largest oilfield services provider, published its Q4 2014 numbers on Thursday, January 15, reporting on a challenging quarter for the broader energy space which saw crude oil prices plummet by close to 40%. While the turmoil in the oil markets didn’t reflect on the company’s adjusted quarterly earnings, given the contract driven nature of the services industry, the company took significant one-time charges relating to write-downs in assets values and noted that it would be cutting about 9,000 jobs on the back of lower anticipated exploration and production spending. The company’s quarterly revenues grew by 6% year-over-year to $12.64 billion, while adjusted-operating income grew 9% to $1.94 billion. ^[1] On a GAAP basis, the company’s income before taxes fell by around 67% to $715 million. Below are some key takeaways from the earnings.

Trefis has a $105 price estimate for Schlumberger, which represents a 37% premium to the current market price. We are currently updating our valuation model to account for the earnings release.

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Earnings Grow On North America and Middle East Activity

North America proved to be the key driver of Schlumberger’s Q4 earnings, with both revenues and pre-tax earnings from the region growing by over 18% year over year. The North American results were aided by the Production product group, which saw higher demand for the pressure pumping services, although the Reservoir Characterization and Drilling product groups witnessed sequential declines. Schlumberger also benefited from continued efficiency improvements and the uptake of new technologies such as the BroadBand sequence hydraulic fracturing service, which helps customers improve the productivity of their reservoirs. The results of the company’s international operations, which account for close to two-thirds of revenues, were somewhat mixed.  Pre-tax operating income grew by 4% year-over-year, while revenues grew by a modest 1%. Growth was strongest in the Middle East and Asia geomarkets, driven by a year-over-year growth in the rig count in Saudi Arabia, and robust activity in Kuwait and the United Arab Emirates. The Europe/CIS/Africa market proved challenging, with revenues from the region falling by around 5% year-over-year on the back of activity declines in Russia – a market which has been reeling under the decline of the ruble and the impacts of economic sanctions – as well as due to weakness in parts of Europe and Africa, where the rig counts fell in response to the dramatic decline in oil prices. ^[1]

Writedowns, Headcount Reductions Set The Tone For A Difficult Year

Benchmark Brent crude oil prices have fallen to levels of below $50 per barrel, touching six year lows, owing to sluggish outlook for global oil demand growth and strong supplies from U.S. shale oil fields. Prices could remain under pressure through 2015, due to further growth in U.S. production. The near-term situation doesn’t bode well for the oilfield services industry, since oil and gas companies are seeing their cash flows come under pressure, leading them to cut back on their exploration and spending budgets for 2015. We believe that upstream capex cuts of 20% and above are likely. Schlumberger has been taking a number of actions to restructure and resize the company to better face the downturn. The company noted that it will reduce its overall headcount by around 9,000 (roughly 7% of its workforce of 126,000) to better align with anticipated activity levels for 2015. Additionally, the company has taken a record number of charges during the quarter including a $199 million pre-tax charge related to the write-down in the value of a production management project in the Eagle Ford Shale, an $806 million charge relating to the restructuring of its WesternGeco marine seismic operations, and a $296 million charge relating to the headcount reductions. The company will also be reducing its capital expenditures (excluding multiclient and SPM investments) for 2015 to $3 billion, down from around $4 billion last year.

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1. Schlumberger Announces Full-Year and Fourth-Quarter 2014 Results [↩] [↩]