North America, Technology Lift Schlumberger To Profit

Strong activity in North America, led by growth in hydraulic fracturing and drilling services with technology gains, helped push first-quarter 2017 revenue for Schlumberger Ltd. (NYSE: SLB) to $6.9 billion, about a 6% increase compared with a year ago.

But lackluster international activity and the continued anemic state of the offshore sector didn’t do much to help.

“Unfortunately, more than 70% of SLB’s revenue is international, which didn’t hold up very well, impacted by seasonality in Russia, the North Sea, and China [which we expected]; weakness in the Middle East [which surprised us]; and partly offset by improved Latin America [highly volatile],” Barclays said in a note April 21.

Investors want to see better overall incremental margins, the analysts added. But that could be “hard to do if international remains a drag in the coming quarters.”

Schlumberger said its international revenue dropped by 7% to about $4.9 billion compared with the previous quarter, while North America revenue grew by 6% to $1.9 billion.

Oil prices steadily holding above $50per barrel—plus production cuts by OPEC and some non-OPEC members—have given oil and gas companies in North America, particularly in the U.S., enough confidence to increase drilling after the downturn forced cuts two years ago.

As activity increases in the U.S., along with rig counts, so have calls for technology capable of improving operational efficiency and cutting costs.

During an earnings call April 21, Schlumberger CEO Paal Kibsgaard highlighted some technologies:

• Matador Resources Co. (NYSE: MTDR) saw a 35% increase in rate of penetration in the Permian with use of Schlumberger’s AxeBlade drillbit, which features unique ridge-shaped cutting elements that enable it to break rock more efficiently and with less force, according to Schlumberger; and
• “Our PowerDrive Orbit rotary steering technology continues to be sold out for a third successive quarter,” Kibsgaard said. A campaign featuring the technology for Parsley Energy Inc. (NYSE: PE) in the Midland and Delaware basins contributed to a 17% reduction in the average drilling time per well and a 30% reduction in the drilling costs per lateral foot.

“As expected the North America land market continued to strengthen in the first quarter in terms of activity and pricing, leading us to start full-scale deployment of idle capacity for most product lines,” Patrick Schorn, president of operations for Schlumberger, said during the call. “Revenue growth was led by hydraulic fracturing and drilling services but also increasingly supported by artificial lift, service systems and valves and measurement.”

Financial Highlights

Schlumberger said its hydraulic fracturing and directional drilling services on U.S. land saw 16% sequential revenue growth and 66% incremental margins.

But it still wasn’t enough to swing the company’s production group to a profit. The group’s profit fell to $2.2 billion, down 8% year-on-year but down 1% compared to the previous quarter. Dragging down potential gains were less revenue on Schlumberger Production Management projects in Ecuador, reduced drilling and hydraulic fracturing activity on land in the Middle East, and lower completions product sales.

“Overall, the numbers weren’t great as EBITDA came in 4% below our forecast, primarily from weaker performance in the Production Group as improvement in US land was more than offset by issues in Ecuador and Middle East weakness from pricing and lower activity levels,” Barclays said.

The U.S. Gulf of Mexico picture was also bleak, as revenue fell again. The deepwater rig count fell to 15, a 74% drop from the peak activity level in 2014, Schorn said, adding U.S. offshore seismic multiclient sales also fell. Both sent offshore revenues to “unprecedented low levels.”

“In parallel we faced record low-level activity as services pricing in several recent cases have fallen to levels that makes it impossible for us to uphold our operating standards and at the same time turn a profit in an extremely challenging operating environment,” Schorn said. “We are therefore in the process of redeploying both service capacity and technical support resources from the U.S. Gulf of Mexico to other more viable markets.”

Speaking about offshore activity in general, Kibsgaard said the company has not seen significant final investment decisions (FID) reached for offshore projects by international oil companies, but it’s important for Schlumberger to secure work for projects once past FID.

However, “if you look at jackup utilization, I think there is a slight uptick on it. There are probably some early signs that we’ll get some light coming our way as an industry,” Kibsgaard said, noting shallow-water activity could pick up in second-half 2017 leading into 2018.

In March, Schlumberger bought a stake in rig operator Borr Drilling, investing $221 million. The main driver for the move is to create a platform that offers performance drilling offshore in shallow-water working closely with Borr with a new type of contract model, Schlumberger said. The deal holds additional market potential for the Cameron Group in terms of BOPs and drilling packages.

Across The World

Kibsgaard said he also sees potential opportunities for new commercial models in Brazil as Petrobras continues its asset divestment program and a focus on mature land basins emerges.

In Argentina, where Schlumberger recently agreed to team up with YPF in a joint development in the Vaca Muerta Shale, “new plans to bring stability to natural gas prices should lead to higher investment levels,” he added.

Elsewhere, activity growth is expected in North Africa, including in Libya where Schlumberger said it is preparing to reenter and start a small-scale land operation in the second quarter.

On-land activity improvement is also anticipated in Chad, Congo and Ethiopia as well as a few deepwater startups in Congo, Guinea and the Ivory Coast, Kibsgaard said. No significant growth is expected in the Middle East, while a normal seasonal recovery is forecast for China.

“It’s clear that activity in international markets has reached bottom in all regions,” Kibsgaard said. “But even though we see positive signs in many countries, we expect only moderate sequential activity growth in the coming quarters. This slow recovery, together with the lingering price pressure, means that we will likely face another challenging year in international markets.”

For first-quarter 2017, Latin America area revenue was flat compared to the previous quarter, while revenue in the Europe, CIS and Africa area dropped 10% with revenue in the Middle East and Asia area falling 7%.

“Still, the underlying activity and sentiment from our global customer base were in line with expectations as seen, for instance, by the flat sequential revenue trends in the rest of Latin America as well as in Africa, confirming that these regions have indeed reached the bottom of the cycle,” Schlumberger said.

Velda Addison can be reached at vaddison@hartenergy.com.