Why Schlumberger Is Reducing Its Seismic Survey Fleet

Schlumberger (NYSE:SLB), the largest oilfield services provider, will be scaling down its marine seismic operations amid concerns that oil and gas companies could dial back their exploration spending following a sharp decline in crude oil prices.  The company will be retiring older and higher-cost vessels held by its WesternGeco marine seismic business, reducing the fleet to 9 survey vessels and 6 source boats, compared to 15 survey vessels and 8 source boats as of the end of 2013. The company expects to take an $800 million charge during Q4 related to the writedown in value of the fleet. Schlumberger also intends to modify some low-end vessels into source boats while also canceling most leases on vessels that it had hired from third parties. The move should help Schlumberger cut costs and better manage margins for its usually lucrative reservoir characterization segment, as the market for exploration services faces an increasingly uncertain outlook.

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Oil and gas exploration companies require reservoir characterization services to locate and define hydrocarbon resources. Seismic surveys, which constitute among the first operations in oil and gas exploration, are used to produce images of the rocks in the earth’s subsurface, helping to locate and determine the size of  oil and gas reservoirs. While spending on exploration and seismic activity remained strong over the last decade or so, buoyed by several large discoveries, companies are likely to scale back on spending going forward considering the present crude oil pricing environment.

Crude oil prices have fallen to 5-year lows, declining by over 35% since mid-June, testing the cash flows of integrated and independent oil companies. Oil companies will be more circumspect about investing in seeking out new discoveries, instead focusing their upstream capital budgets on improving the productivity and flow rates of their existing wells in order to maximize returns on already invested capital. This could mean that they will direct a larger portion of their budgets on areas such as stimulation and reservoir optimization. This year has been largely lackluster on the new discovery front, with Schlumberger indicating that there were only 3 billion barrels of recoverable oil and condensate discovered, the lowest levels in nearly 25 years. ^[1]

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1. Schlumberger to retire seismic vessels, take $800M impairment,  Fuel Fix, December 2014 [↩]