Schlumberger Earnings: Rediscovering The American Dream
(Bloomberg Gadfly) -- What a difference three months, and $10, make for Schlumberger Ltd.
The world's biggest oilfield services company kicked off earnings season for the industry on Friday morning. Three months ago, unveiling third-quarter figures, it had this to say on the outlook for North American drilling and fracking:
The investment appetite in North America land now seems to be moderating, driven by a growing focus from E&P companies on financial return and the need to operate within cash flow rather than the pursuit of production growth.
Since then, Brent crude oil has risen roughly another $10 a barrel to almost $70. With North American exploration and production companies apparently taking the opportunity to hedge more of their expected production in 2018, doubts about their professed drilling discipline have crept back into the market. And Schlumberger's tune has also changed:
In North America, 2018 shale oil production is set for another year of strong growth, as the positive oil market sentiments will likely increase both investment appetite and availability of financing.
Also on Friday, the International Energy Agency bumped up its estimate for U.S. crude oil production this year to 10.4 million barrels a day, surpassing the country's prior record in 1970. OPEC raised its own estimate the day before.
So the first takeaway from Schlumberger's numbers is that it adds another signal that shale production is set for a big jump this year, and one from a company embedded deeply in the global oil and gas business.
It isn't just words. Three weeks ago, Schlumberger announced a surprise deal to buy Weatherford International PLC's U.S. pressure pumping fleet (used for fracking wells) for $430 million. Originally, the two companies planned to pool their efforts in a joint-venture servicing E&P firms. Instead, Schlumberger capitalized on Weatherford's weakness -- it had net debt to capital of 84 percent at the end of September -- to get 20 frack fleets for a song.
Factoring in $100 million for the cost of getting some of these back to working order after being mothballed, Schlumberger got them at roughly $500 per unit of hydraulic horsepower, at least a third lower than the cost of newly built equipment. And they're going straight back to work, too: Schlumberger expects to deploy all of them this year, just as it did with its existing fleet last year (and was hence maxed out).
Schlumberger's pivot fits with the zeitgeist. There's a two-speed global oil and gas market, with North American investment set to rise another 15-20 percent this year, according to Schlumberger, while spending in the rest of the world is set to eke out a gain for the first time in four years, of 5 percent. Schlumberger has a bigger international business than its rivals and has, unsurprisingly, tended to talk up the prospects of a recovery there.
Yet the market is the market, and North America's share in Schlumberger's revenue has been climbing since the start of 2016. Of the roughly $1.1 billion increase, year over year, in revenue before eliminations in the fourth quarter, the region accounted for 98 percent of that growth.
Schlumberger reiterated its optimism about international markets on Friday, citing several new contracts in Saudi Arabia and India, among other countries. The logic of Schlumberger's position is clear: Several years of lower spending must ultimately lead to fears of a supply gap and, therefore, resumed investment in areas outside of North America's shale hot-spots.
The difficulty it still faces, however, is getting the market enthused about this while rivals with higher exposure to those hot-spots, especially Halliburton Corp., hold the spotlight in the near term. It didn't help that Schlumberger said the current quarter will be "transitory" as it absorbs the extra cost of redeploying people and assets for those international contract wins. Nor did a roughly $1 billion write-off of its business in Venezuela.
The real numbers to watch when it comes to gauging how quickly Schlumberger's international business will accelerate, though, are medium-term oil-price expectations. For oil majors to ramp up spending on prospects outside of the shale patch, which take longer to develop, they'll need comfort that the market will be favorable when those barrels eventually appear.
While oil futures aren't forecasts, a sustained increase in prices at the back end of the curve would certainly offer some such comfort. As it is, 2020 Brent swaps have climbed about $6 a barrel since Schlumberger's last set of results, nudging them above $60.
For that helpful trend to continue, though, we'll need to see signs of moderation in the business that is currently powering Schlumberger's revenue and profits: North America.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.
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