Oil services giant Schlumberger revealed its revenue took a 33% plunge in 3Q 2015 with revenue hitting almost US$8.5 billion for the period, citing a decline in rig activity and pricing pressure as the reasons. The results are causing the company to also proceed with a further round of capacity and overhead reductions.
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Image from Schlumberger. |
Schlumberger raked in more than $12.6 billion in 3Q 2014 (representing the 33% drop), and about $9 billion last quarter, representig a 6% decrease.
In the US Gulf of Mexico, revenue fell slightly on lower multiclient seismic sales while higher technology sales limited the impact of pricing concessions. However, the trend of exploration rigs transferring to drilling and completion activities continued. The company’s offshore margin also decreased as work shifted from deepwater exploration to completions and well intervention, Schlumberger said.
Revenue for the international areas also showed a decrease of 7% at $6.1 billion due to customer budget cuts and continued pricing concessions.
“Schlumberger 3Q revenue decreased 6% sequentially driven by a continuing decline in rig activity and persistent pricing pressure throughout our global operations. North America revenue fell 4% sequentially as we focused on balancing margins and market share, while International revenue dropped 7% due to customer budget cuts, activity disruptions, and service pricing erosion,” Paal Kibsgaard, Schlumberger chairman and CEO said.
“The business environment deteriorated further in the third quarter. However, the cost reduction actions we took in previous quarters and the acceleration of our transformation program enabled us to protect our financial performance in what is shaping up to be the most severe downturn in the industry for decades. As a result of our actions, we have been able to deliver pretax operating margins well above those seen in any previous downturn and we have continued to generate significant liquidity with free cash flow of $1.7 billion in the 3Q, representing 170% of earning,” Kibsgaard added.
The combination of oil price recovery, subsequent increase in oilfield services activity, and a more conservative spending outlook from Schlumberger's customers is resulting in further action for the company to proceed with a further round of capacity and overhead reductions, which will result in a restructuring charge in 4Q.
"Our forward visibility has again been reduced and we will consequently revert back to managing the company quarter-by-quarter. This means a further round of capacity and overhead reductions in 4Q as we adjust resources to a lower activity outlook. At the same time, we will continue to accelerate our transformation program with the next step being a significant restructuring of our global manufacturing and distribution network, which will further modernize the core part of our company," Kibsgaard said.
Malcolm Graham-Wood, owner at Hydrocarbon Capital Ltd., said that Schlumberger's 3Q results proved that the period was worse than expected, and that the company's steps to adapt to the situation are also working to a great extent.
"Beating the whisper by just $0.01, coming in with $0.78 was fine and the revenue at $8.5 billion appeared about in line, free cash flow was up at $1.7 billion showing some strength in this market. The business environment ‘deteriorated’ in the quarter but the cost reductions and business transformation program meant that operating margins were ‘well above’ those seen in any previous downturn. Generating significant liquidity as shown by the free cash flow number is impressive in what the company describe as being an ‘increasingly challenging’ time for oilfield services companies as clients cut costs and take a conservative view on 2016 spending. So clearly not out of the woods yet but SLB is demonstrating significant resilience and an ability to adapt to the current circumstances."
According to a Simmons & Co. analyst, notwithstanding ongoing rebalancing in the oil markets, grim austerity and accelerating headwinds over the next few quarters will prevail given depleted financial wherewithal on the part of the industry. The analyst firm also said that 2016 will likely result in contracting global exploration and production capital spending, representing the first consecutive decline since 1986.
Schlumberger said in its report that it will continue to seek opportunities to extend its portfolio through targeted mergers and acquisitions (M&A), such as its mega merger announcement with Cameron.
On 26 August, the two giants entered into a $14.8 billion definitive merger agreement in which Cameron will merge with an indirect wholly-owned subsidiary of Schlumberger in a stock-and-cash transaction. The agreement, unanimously approved by both boards of directors, will offer Cameron shareholders 0.716 shares of Schlumberger common stock and a cash payment of $14.44 in exchange for each Cameron share.
In the beginning of September, Schlumberger announced its takeover of Novatek Inc. and Novatek IP, LLC, providing a new platform to improve drilling performance to its portfolio.
After several extensions, Schlumberger dropped out of its proposed $1.7 billion acquisition of Russian drilling contactor Eurasia Drilling Co. at the end of September to allow the company to focus on other M&A opportunities.
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