Turmoil In Global Crude Oil Market Will Hurt Schlumberger, But Is The Market Overestimating The Pain?

In the recent earnings release, Schlumberger (NYSE: SLB) reported a 9% sequential decline in total revenues, primarily due to lower customer spending and drilling activity in the North American region. Excluding the impact of an $8.5-billion impairment charges, the operating margin slipped by 100 bps to 10.4% (y-o-y) for the first quarter. Though margin declines were largely associated with the Reservoir Characterization business, the operating margin of Drilling and Production segments remained relatively flat. Despite the oil supply glut, Trefis expects Schlumberger’s Drilling and Production operations to stay buoyant and support the company’s earnings in 2020. More specifically, we believe that the company will report total revenues of $27.1 billion for full-year 2020 – a figure 12% higher than the consensus estimate of $24.2 billion for the year. Notably, this is 17% below the $32.9 billion in revenues the company reported in 2019.

With the global oil demand likely to shrink significantly for the full year 2020, Trefis highlights the trends in Schlumberger’s Revenues across operating segments in an interactive dashboard that highlights how the company makes money – parts of which are summarized below.

A Quick Look At Schlumberger’s Revenues

Schlumberger’s four operating segments generated $33 billion of operating revenues for the full-year 2019.

• Reservoir Characterization: $6.3 billion in FY2019 (19% of Operating Revenue). This segment provides principal technologies involved during searching and defining of hydrocarbon deposits.
• Drilling: $9.5 billion in FY2019 (29% of Operating Revenue). This segment offers products and services required during drilling and positioning of oil and gas wells.
• Production: $12 billion in FY2019 (36% of Operating Revenue). This segment provides real-time evaluation and monitoring services for production management to oil companies.
• Cameron: $5.2 billion in FY2019 (16% of Operating Revenue). It’s an entity within Schlumberger that provides a range of equipment for managing pressure and flow control in oil rigs.

Revenue declines associated with lower capital expenditure allocation by upstream oil & gas giants

• The company’s top line is affected by seasonal declines during the first quarter, but the ongoing recessionary environment triggered steeper falls due to tighter capital expenditure allocation by clients.
• Revenue declines were largely associated with the company’s North America region, which observed an 18% decline (y-o-y), while the International region actually reported a low single-digit growth.
• While the Reservoir characterization segment observed a 20% sequential drop due to seasonal and COVID-19 related disruptions, the Production and Drilling segments were primarily affected by seasonal factors.
• With the oil majors expected to reduce their capex spend by 15-20% due to excess supply in international markets, Schlumberger will observe top-line erosion for the full year.
• However, the impact in the near- to mid-term will be cushioned by the fact that a sizable chunk of these revenues can be attributed to multi-year contracts with clients.

Drilling and Production margins relatively stable despite a steep fall in revenues

• The company reported a 10.4% pre-tax operating margin, excluding one-time impairment charges, for the quarter.
• Despite the sharp drop in revenues, the overall operating margin declined by just 100 bps on an annual basis.
• It was largely due to stable margins associated with the Drilling and Production segments, which together contribute 65% of the total revenues.
• As the revenues are expected to contract further, the Drilling and Production segments are likely to drive earnings for the full year.

But how has Schlumberger fared vs. peer Halliburton? We compare the performance of these two companies over the last few years as we answer the question: Is Halliburton Expensive Or Cheap Compared To Schlumberger After Declining Over -75%?

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