Schlumberger Limited has reported results for the 2Q16. Schlumberger Chairman and CEO Paal Kibsgaard commented, “In the second quarter, market conditions worsened further in most parts of our global operations, but in spite of the continuing headwinds we now appear to have reached the bottom of the cycle. As we continued to navigate this challenging environment, we again delivered robust pretax operating income, operating margin, and free cash flow. This performance came as a result of our strong execution and, in some cases, at the expense of revenue as we began shifting focus onto recovering our pricing concessions and high grading our contract portfolio.”
“Our second quarter revenue increased 10% sequentially, reflecting a full quarter of activity from the acquired Cameron businesses that contributed US$1.5 billion in revenue. On a pro forma basis, revenue decreased 12% sequentially with North America falling 20% due to the Canadian spring break-up and a 25% drop in the US land rig count, while international revenue decreased 9% due to weaker activity, continued pricing pressure, and a large scale cutback in our operations in Venezuela. However, our wide geographical footprint and broad technology portfolio continued to offer unique advantages that helped to mitigate these effects.
“Among the business segments, second quarter revenues from the reservoir characterisation and production groups declined sequentially by 9% and 11%, respectively, on continued lower demand for exploration and development-related products and services as exploration and production budgets were further reduced. Drilling group revenue fell by 18%, impacted by the steep drop in rig count, particularly in North and Latin America. Cameron Group revenue decreased 6% sequentially on a pro forma basis due to declining project backlog and a further slowdown in activity in US land that impacted the short cycle businesses.
“Pretax operating margin was maintained above 10% after a sequential drop of 340 basis points due to lower activity, pricing headwinds, an unfavourable activity mix and the significant reduction of our operations in Venezuela.
Decremental operating margin on a sequential pro forma basis was limited to 38% as a result of solid cost and resource management while we continued to maintain our long term capability. The margin decrease has been highest in the drilling group, where margin contracted by 649 bps to 8%.Sequentially, production group pretax operating margin fell 459 bps to 4%, reservoir characterisation group decreased 228 bps to 17%, and the Cameron Group posted a margin of 16%. Diluted earnings per share of US$0.23, excluding charges and credits, was 43% lower sequentially.
“As a result of the weakness in activity that will persist through 2016 as expected, we have made another significant adjustment to our cost and resource base, including the release of more than 16 000 employees during the first half of 2016 and a further streamlining of our overhead, infrastructure, and asset base. This has led to US$646 million in restructuring charges in the second quarter for the reduction in our workforce, as well as a non-cash US$1.9 billion impairment charge for fixed assets, inventory, and multi-client seismic data. We also recognised US$335 million in merger and integration charges relating to the Cameron acquisition.
“As the downturn has developed, we have changed our focus from managing decremental margins to further strengthening market share where we have seen a significant increase in our tender wins. As oil prices have nearly doubled from their lows of January 2016, we are now shifting our focus to recover the temporary pricing concessions that have been made, and to renegotiate contracts with limited promise of longer term financial viability.
“At the same time, the effects of the cuts that we have seen in exploration and production spending are now clearly visible in falling oil production, and with demand remaining strong, we are heading more rapidly towards an increasing negative gap between global supply and demand for oil. This will require significant capability and capacity to reverse, and without pricing recovery the service industry will be challenged to deliver.
“As we have navigated this downturn, we have made a series of moves that position us well for the inevitable market recovery. Our balance sheet remains strong in spite of the investments we have made in our business and the cash that we have returned to our shareholders. We have expanded our technology portfolio, not only by the major acquisition of Cameron International, but also by a series of smaller acquisitions that are enabling the development of new integrated drilling and production technologies that will further lower cost per barrel. And we have leveraged the opportunities of transformation to create significant competitive advantage and steadily improve our intrinsic performance.
“Whatever shape the recovery takes, service pricing must rise while respecting the need for operators to control their costs in what will likely be a ‘medium for longer’ oil price environment. This provides an opportunity to share the additional value that can be mutually created through collaboration and integration. We will therefore continue to develop the way in which we operate as a company as well as the nature of the work that we undertake, making sure we remain at the forefront of an industry that increasingly needs fundamental change.”
North America pro forma revenue decreased 20% sequentially as a result of the Canadian spring breakup and the US land rig count decline of 25%. Land revenue fell 22% on lower activity in the drilling and Cameron groups, combined with continuing pricing pressure in the production group. While fracturing stage counts and active pressure pumping fleets increased more than 15% sequentially, an unfavourable job and technology mix, combined with pricing pressure, more than offset the increase in volume. North America offshore revenue decreased 17%, mainly due to lower drilling group activity, although this was partially offset by higher WesternGeco multiclient seismic license fees.
International pro forma revenue declined 9% sequentially due to customer budget cuts, continued pricing pressure, activity disruptions, and the scaling back of operations in Venezuela.
Pro forma revenue in the Latin America Area declined 26% sequentially, mainly due to scaling back of operations in Venezuela. Activity in the rest of the area continued to decline, particularly in the Mexico and central America and Brazil Geomarkets, as land and offshore rig counts fell due to customer budgetary constraints. In addition, integrated project work decreased in Mexico as campaigns ended and rigs were demobilised. The drilling group saw the largest drop in the area, while the decline in production group revenue was partially offset by robust Schlumberger Production Management (SPM) operations.
Europe/CIS/Africa Area pro forma revenue decreased 7% sequentially, mainly in the Nigeria and Gulf of Guinea, Central and West Africa, and Angola GeoMarkets where rig counts declined and projects ended. Norway and Denmark GeoMarket revenue declined due to seasonal maintenance shutdowns. Russia and central Asia revenue increased, however, as activity recovered after the winter slowdown and the Russian ruble strengthened.
Middle East and Asia area pro forma revenue declined 2% sequentially. This was mainly due to lower activity in the Asia Pacific region and Australia and Papua New Guinea GeoMarket and as a result of customer budget cuts and project completions, with the drilling group most affected by this decline. However, revenue from the China GeoMarket increased on higher Cameron group activity. Revenue from the Middle Eastern GeoMarkets was essentially flat as increased activity for the production and reservoir characterisation groups was offset by pricing concessions.
Adapted from press release by Francesca Brindle
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