Schlumberger Q1 Preview: International Focus Should Soften Blow From The U.S. Land Market

Schlumberger (NYSE:SLB), the largest oilfield services company, is expected to publish its Q1 2015 results on April 16th, reporting on a challenging quarter for the broader industry that is likely to have seen oil and gas companies meaningfully dial back on upstream capital spending as crude oil prices remained low. We expect the company’s quarterly earnings to decline on a sequential as well as on a year-on-year basis on lower oilfield services activity and service cost deflation. That said, Schlumberger’s earnings should hold up better compared to its peers Baker Hughes and Halliburton, owing to its broader product line and smaller revenue exposure to the North American market, where a bulk of the cutbacks are taking place. During Q4 2014, 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. Here’s a quick look at what to expect when Schlumberger publishes earnings later this week.

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Trefis has a $95 price estimate for Schlumberger, which is about 7% ahead of the current market price. We will be updating our price estimate and rig count forecasts post the earnings release.

Lower Activity And Price Declines, But Schlumberger’s International Focus Will Soften The Blow

Benchmark Brent crude oil prices have fallen to levels of about $57 per barrel, owing to the sluggish outlook for global oil demand growth and strong supplies from U.S. shale oil fields. 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. Oilfield services companies are likely to see two trends owing to this. First, overall activity levels will dip as spending on exploration related services falls. Additionally, pricing will also come under pressure as customers will have better bargaining power given the weaker demand. Service cost deflation of 20% and upwards is possible, in our view. Upstream capex cuts of roughly 20% are expected globally, and the cuts are likely to be meaningfully higher for producers focused on North America.

The North American market is primarily driven by shale and tight oil activity, which has higher marginal costs of production (estimated break-even upwards of $60 per barrel, although this can vary by basin) and shorter planning horizons that allow operators to respond to the commodity cycle more quickly. Additionally, the proportion of smaller and highly leveraged oil companies in the North American market is meaningfully higher compared to the global market. The average North American rotary rig count declined by about 27% year over year during Q1, while the average international rig count has remained more resilient, falling by around 5.5% during the same period. ^[1] Drilling activity has actually increased year over year in some regions such as the Middle East. Schlumberger’s lower exposure to the North American market (33% of FY 2014 revenue from North America vs. 54% for Halliburton) should allow it to fare better compared to its peers.

Downsizing To Cope With Current Market Realities

Schlumberger has been taking a number of actions to restructure and resize the company to better face the downturn. In January, the company noted that it would 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.  It suggested as well that there could be more cuts going into Q2. The company will also be reducing its capital expenditures for 2015 to $3 billion (excluding multiclient and SPM investments), down from around $4 billion last year. Last year, the company scaled back on its marine seismic operations, downsizing its fleet from about 23 vessels to about 15, by retiring older and higher-cost vessels held by its WesternGeco marine seismic business. While Schlumberger’s margins will see a meaningful contraction this year, they should eventually pull back as the company adjusts its cost structure to reflect the current trends and realities in the oilfield services market.

Change In Activity Mix, New Technology Uptake

In the current environment, oil companies have become more circumspect about investing in seeking out new discoveries, instead focusing their lower capital budgets on improving the productivity and flow rates of their drilled wells in order to maximize returns on invested capital. This should allow demand for production-related services such as artificial lift and stimulation services (pressure pumping) to hold up better compared to seismic and drilling related services. Service intensities for pressure pumping could also increase (more fracking stages, higher volumes of proppant) while the trend of re-fracking wells is also likely to have gathered momentum. Schlumberger could also see a strong uptake of new technologies and products such as the BroadBand sequence hydraulic fracturing service, which helps customers improve reservoir productivity. ^[2]

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1. Baker Hughes Rig Count [↩]
2. Schlumberger CEO sees new tech elevated amid falling prices, Fuelfix, January 2015 [↩]