Schlumberger’s 2Q’17 Results To Improve Backed By Growing Drilling Demand

by Trefis Team
Schlumberger Limited
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Schlumberger (NYSE:SLB), the world’s largest oilfield services company, is set to initiate the earnings season for the industry by releasing its June quarter 2017 financial performance on 21st July 2017((Schlumberger To Announce June Quarter 2017 Results, 23rd May 2017, Unlike disappointing results in the last quarter, the market expects the Houston-based company to report a notable improvement in its revenues as well as earnings, driven by the rising drilling demand, particularly in North America. In addition to this, the oilfield contractor has entered into several joint ventures and partnerships during the last three months with an aim to strengthen its position in its key markets. These agreements may not have a direct impact on the second quarter results, but are likely to boost the company’s value for the full year 2017 and beyond.

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Rising Drilling Demand To Boost Revenues & Profits In Short Term

Driven by the rebound of commodity prices in the first quarter on the back of the OPEC’s production cuts, the global rig count, primarily in the North American markets, continued to grow sharply even in the second quarter. The global rig count rose more than 45% on a year-on-year basis to 2,014 units at the end of the June quarter, while the North American rig count more than doubled to 1,081 units in the same time frame. This increase in demand for drilling and exploration equipment and services was driven by the growing investments by North American shale producers to resurface their production to leverage the rising commodity prices. Thus, oilfield service providers, like Schlumberger, are likely to benefit from this steep rise in drilling demand, and are expected to report solid improvement in the current and forthcoming quarters.

That said, the rally in commodity prices, particularly crude oil, subsided in the second quarter due to the expanding US oil inventories and production. The global benchmark, WTI crude oil, averaged at $48 per barrel in 2Q’17, down from an average of $52 per barrel in the previous quarter. Accordingly, we figure that the sudden growth in drilling demand may not be sustainable, and is likely to shrink in the coming quarters, if the commodity prices plunge again.  

Joint Ventures & Partnerships

In 2Q’17, Schlumberger and Production Plus Energy Services announced a joint venture with an aim to promote and develop the HEAL System technology and business, a horizontal well production system. The HEAL System offers producers with a proven solution to the overcome the issues related to the entire life cycle of horizontal wells by controlling frac flowback, extending natural flow period, simplifying transition between artificial lift phases, and reducing operating expenses.

The system has consistently achieved productivity increases of 30-100% in typical horizontal wells across western Canada and the US, and has saved operating costs in nearly 200 wells in more than 35 formations across North America. The joint venture that began functioning on 31st May 2017 will autonomously market the technology across North America, while Schlumberger will be its sole distributor outside the region. This deal will not only give Schlumberger a first mover advantage in this new market, but will also boost its top line, since producers are looking for products that maximize their production from existing wells while restricting their costs.

The Nigeria Deal

Apart from the joint venture, Schlumberger has also entered into a tripartite agreement with Nigerian National Petroleum Corporation (NNPC), FIRST Exploration & Production (First E&P) for development of the Anyala and Madu fields under OML 83 and OML 85, offshore Nigeria. The fields are estimated to hold reserves of 193 million barrels of crude and 800 billion cubic feet of gas, and are expected to produce 50,000 barrels of oil and 120 million cubic feet of gas daily on completion of field development in early 2019.

Under the agreement, Schlumberger will contribute the required services in kind and capital for the project development until first oil. The offshore fields, also known as oil-mining leases 83 and 85, are owned 60% by NNPC and 40% by First E&P, which is also the operator of the joint venture. The investment in the project, phased over several years, is estimated at $700 million. With this deal, Schlumberger will be the first to tap into the Nigerian markets, Africa’s biggest oil producers, and the deal will strengthen its international operations in the long term.

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

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