Schlumberger’s 1Q’17 Profits To Be Weak Despite Recovery In Commodity Prices

by Trefis Team
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Schlumberger (NYSE:SLB), the world’s largest oilfield services company, is slated to release its March quarter 2017 financial performance on 21st April 2017((Schlumberger To Announce March Quarter 2017 Results, 7th February 2017, www.slb.com)). While the Houston-based company’s top-line is expected to see a notable improvement due to the rebound in commodity prices over the past three months, the market expects the company’s 1Q’17 profits to shrink on a sequential as well as annual basis. As pointed out by the company’s management, the company’s repeated efforts to collect $1.1 billion due from the Ecuador state-owned Petroamazonas have failed, and are likely to weigh on its first quarter performance.

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Key Highlights Of 1Q’17

As the Organization of Petroleum Exporting Countries (OPEC) implemented the oil production cuts beginning 2017, the commodity markets saw a sudden surge in crude oil prices. WTI crude oil prices averaged at $52 per barrel in the first quarter of 2017, 55% higher than the average oil price of $33 per barrel in the same quarter last year. Consequently, the demand for drilling and exploration equipment and services improved drastically, causing the global rig count (oil and gas) to rise from an average of 1,734 units in the March quarter of 2016 to 1,977 units in the latest quarter. With the recovery in the global rig count, we expect Schlumberger’s 1Q’17 revenues to increase on a year-on-year basis.

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In addition, Schlumberger recently won an engineering, procurement, and construction (EPC) contract from BP Plc. to supply the subsea production system for the Mad Dog 2 development in the Gulf of Mexico. This implies that despite the continued pricing pressure in the market, Schlumberger has managed to attract new contracts for its rigs, reinforcing its dominance as a market leader.

Joint Venture With Weatherford

Since the industry experts predict that the onshore drilling markets are expected to rebound faster than the offshore markets, Schlumberger has entered into a joint venture, OneStim, with Weatherford to create a new industry leader providing hydraulic fracturing and multistage completions technologies in the North America onshore markets at relatively lower costs. Schlumberger will hold a majority in the 70-30 joint venture, and will pay a one-time sum of $535 million to Weatherford. In return, Weatherford will contribute its robust multistage completions portfolio, cost-effective regional manufacturing capability, and supply chain to the venture. On the other hand, Schlumberger will provide access to its surface and downhole technologies, efficient operational processes, and advanced geo-engineered workflows.

Based on the scale of operations of the venture, we believe that OneStim is likely to offer a cost-effective and highly competitive service delivery platform to its customers. With this deal, Schlumberger will not only become a market leader in the hydraulic fracturing and multistage completions sector, but will also be able to enhance its profitability, and return higher value to its shareholders in the forthcoming quarters.

Lift IQ – New Management Service

Before the end of the March quarter, Schlumberger announced a new service called the Lift IQ production life cycle management service. This new service allows monitoring, diagnostics, and optimization of artificial lift systems on a real-time basis to enhance field recovery and improve the productive life of a well, bringing down the overall costs for the clients. Since most of the oil and gas drillers are seeking to reduce their operating costs amidst the commodity slump, this new service is expected to maximize their well productivity, as well as result in significant cost savings for them.

Schlumberger has already implemented the Lift IQ service for a few of its clients across regions, who have generated notable operational efficiencies and cost savings in a short span of time. Thus, we believe that if the company is able to offer this service to a larger number of customers, its revenue could improve sharply in the coming quarters.

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