Schlumberger Misses 1Q’17 Estimates Due To Weak International Markets; North America To Lead Recovery

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Schlumberger Limited (NYSE:SLB), kick-started the earnings season for the oilfield services industry last week on a disappointing note. As expected, the world’s largest oilfield services company posted a decline in its net profit for the March quarter((Schlumberger Reports March Quarter 2017 Results, 21st April 2017, www.slb.com)), both sequentially as well as annually, despite the sharp rise in the global drilling demand over the last few months. While the earnings miss was anticipated by the market, backed by the company’s negative commentary earlier this month, the revenue miss came as a surprise to the investors. As a result, the company’s stock dropped more than 2%, setting a pessimistic tone for the other players in the sector, Halliburton and Baker Hughes, who are slated to release their first quarter results later this week.

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Operational Performance

In spite of a 12% rise in the global rig count in the last quarter, Schlumberger saw a 3% sequential drop in its 1Q’17 revenue. However, in comparison to the same quarter of last year, the company’s top-line grew roughly 6% to $6.89 billion, driven by the improvement in the North American onshore demand. The rebound in the North American drilling demand not only boosted Schlumberger’s operations and pricing power in the region, but also led to the accelerated deployment of idle capacity for its multiple product lines. That said, the weakness in the international markets – particularly China, Russia, and the North Sea – dragged down the company’s revenue for the quarter. In addition, the sluggish demand in the US Gulf of Mexico (GOM) and Canada further restricted the oilfield provider’s top-line growth.

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Source: Company Filings

In order to sustain its profits, Schlumberger continued to optimize its cost structure by entering into joint ventures and acquiring complementing businesses. Thus, despite the non-payment from the Shushufindi project in Ecuador, the company managed post operating profits of $473 million in the March quarter as opposed to a loss of $74 million in the previous quarter. While the first quarter profits were significantly lower than the profits of the same quarter of 2016, the improvement in the bottom-line is indicative of the fact that the company is making consistent efforts to take advantage of the recovery in the commodity markets and maintain its position as an industry leader.

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Source: Google Finance; US Energy Information Administration (EIA)

On the financial front, Schlumberger’s performance remained depressed. The company generated cash flow from operations of merely $650 million, as against $$1.2 billion a year ago. Consequently, its cash and cash equivalents at the end of the quarter declined to $7.35 billion from $9.25 billion at the beginning of this year. This caused the company’s net debt to rise to over $11.5 billion, even after it repaid more than $600 million of its debt during the quarter. That said, Schlumberger repurchased about 4.7 million shares for a sum of $372 million in the March quarter. Further, the company’s board also approved a quarterly dividend of $0.50 per share. This reinforces the company’s willingness to return value to its shareholders even in a low price environment.

Going Forward

As stated in the previous calls, Schlumberger foresees North American markets to lead the recovery in the oilfield services industry. The company anticipates a 50% jump in the E&P investments in the North American onshore projects, which is likely to increase the demand for drilling equipment and services, and reduce the pricing pressure in the region. Consequently, the company 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. With this new venture, the company expects to see a steep rise in its revenue and profits from the region.

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Contrary to the rebound in North American markets, Schlumberger expects the international markets to remain soft for most part of the year, and start recovering towards the back-end of 2017 or early 2018. However, the company is proactively negotiating deals and joint ventures in some of these international markets to be prepared for their recovery. For instance, Schlumberger recently entered into an agreement with YPF for a joint development of the Vaca Muerta Shale Oil Pilot in Argentina. This venture will allow the company to leverage its reservoir knowledge and expertise in unconventional completions to create operational efficiencies and generate cost savings for its clients.

Thus, we figure that while Schlumberger missed the market expectations for the quarter, it is preparing itself to take advantage of the anticipated upswing in the commodity markets by entering into acquisitions, and joint ventures, and building a strong yet cost efficient product mix.

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