On Thursday afternoon, Schlumberger was the first company in O&G to report 4Q15 earnings. Friday morning, shares are 6% higher, lifted in part by the broader rally in the markets and oil prices.
1.Schlumberger CEO Sees His Customers Experiencing A Financial Crisis. In the press release, Paal Kibsgaard used strong words we haven’t heard used by him or any other service company so far. He said: “The worsening market conditions added further pressure to a deepening financial crisis in the E&P industry, and prompted customers to make further cuts to already significantly lower E&P investment levels.” On the conference call, Kibsgaard said 2015 was the worst industry downturn since 1986.
2.The 10,00 Lay-offs We Predicted In December Are Now Confirmed. Thursday’s release confirmed that an additional 10,000 lay-offs have been implemented, taking total downturn lay-offs for the company up to 34,000. Seven weeks ago, we warned Oilpro readers that 10,242 lay-offs could be forthcoming at Schlumberger. The assessment, first published by Oilpro, was based on our interpretation of a financial disclosure in a Schlumberger SEC filing. In the company’s 4Q earnings release, CEO Paal Kibsgaard said: “In anticipation of an extended activity weakness in the first half of 2016, we implemented another significant adjustment to our cost and resource base during the fourth quarter. This included a further workforce reduction of 10,000 employees, as well as greater streamlining of our overhead, infrastructure and asset base.” Importantly, CEO Kibsgaard said on the conference call that he believes the headcount is now the right size for 2016, implying there are no more layoffs expected. That could certainly change with market conditions, but it is encouraging none-the-less.
3.Hoping For A Bottom In 2016, But Schlumberger Isn’t Sure Yet. When asked on the conference call if everything will bottom in 2016, CEO Kibsgaard said: “Well, I think it’s too early to say, but I don’t currently think that 2017 is going to be worse. With that said, I’m still not ready to say that we are [hitting bottom] in 2016. We’re focusing in on executing basically quarter-by-quarter. I’m still optimistic, and I would hope that 2016 is the trough but I’m not ready to rule on it yet.” Schlumberger does expect positive movement in oil prices during 2016, with specific timing being a function of the shape of the non-OPEC decline rates.
4.Abrupt Work Cancellations By Customers Are A Key Theme In The Release. CEO Paal Kibsgaard cited “abrupt” cancellations and activity disruptions several times throughout the press release. This is new and shows the severe strain on operators and rising unpredictability and counter-party risk for oilfield contractors. On the call, Kibsgaard said: “unscheduled and abrupt activity cancellations [are] creating an operating environment that is increasingly complex to navigate.” Some of this was a 4Q phenomena as budgets ran out, but this is something to watch in 2016.
5.Schlumberger May Buy Back Up To $10 Billion Of Its Downtrodden Stock. Schlumberger’s stock has fallen almost 50% in 18 months. This fall may have something to do with the renewal of the company’s existing and almost exhausted $10 billion dollar share repurchase program Thursday. During 2015, SLB bought back $2.2bn of its stock, nearly completing its authorization. Thursday, perhaps partly motivated by the current stock price, the company announced a $10 billion re-load of the buyback. On Friday, CEO Kibsgaard said of capital deployment: “We’re not increasing dividends this year. Beyond that, for the coming year it’s going to be a balancing of the opportunities we have on M&A and the opportunities we have to buy back our stock.”
6.Asset Write-Offs In Full Swing. SLB Takes A $1.6 Billion Hit. CEO Kibsgaard said in the press release that the company took a “largely non-cash $1.6 billion pretax impairment charge for fixed assets, inventory write-downs, facility closures, contract terminations, and other asset impairments.” This marks the start of what we expect to be a steady stream of capacity write-offs this quarter – for both E&P and oilfield service firms. It is part of the painful rebalancing process as management teams calibrate organizations built for $100 oil to new price realities.
7.Cameron Deal To Close By March. The Cameron integration plans are complete. The integration will be simple. Cameron will become the fourth product group at Schlumberger, adding to characterization, drilling, and production. Scott Rowe, Cameron’s CEO, will lead the product group, and Cameron will largely maintain its present form. The customer interface will change, the back office will be streamlined, and R&D will eventually merge into Schlumberger.
8.E&Ps Are Rethinking The Way They Do Things. New technology sales (products developed within 5 years) comprised 24% of 2015 revenue for Schlumberger, markedly higher than what we saw in the previous downturn in 2008, 2009. This is a sign E&Ps are thinking outside the box to cut costs.
9.Oil Production Declines Coming To Rebalance The Market. In North America shale oil production is declining more or less as Schlumberger expected, and was, in December, below the levels from one year ago. The apparent resilience in production outside of OPEC and North America is in many cases driven by producers opening the taps wide open to maximize cash flow, which also means that we will likely see higher decline rates after these short-term actions are exhausted.
10.When Things Do Recover, Deep Costs Cuts Make Oil Service A Coiled Spring.Schlumberger thinks their international business is a highly compressed coiled spring, which will see profits surge when E&P investments start recovering.
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