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Schlumbering No More

By Robert Rapier on January 24, 2017

Oil services bellwether Schlumberger (NYSE: SLB) released fourth-quarter and full-year results last week. Today I want to discuss the highlights that prompted us to issue new guidance on the stock in the most recent issue of The Energy Strategist, and also to review the company’s outlook for the oil sector.

Schlumberger recorded full-year 2016 revenue of $27.8 billion, which was down 22% from 2015. The decline would have been worse without the April acquisition of Cameron that contributed $4.2 billion in revenue over the last three quarters. Excluding Cameron, revenue declined 34%. Full-year 2016 pretax operating income was $3.3 billion, representing a decline of 50% from the prior year.

Fourth-quarter results showed early signs of a turnaround, with revenue up 1% over the third quarter (but still down 8% year-over-year). Pretax operating income for Q4 was down 1% from Q3, and down 37% year-over-year.

Despite the challenging year, the company noted that over the past two years of the downturn in the oil and gas sector it has generated $7.5 billion in free cash flow, more than its major competitors combined.

Business picked up in North America, where revenue was up 4% over Q3, driven by stronger hydraulic fracturing demand as rig counts and stage counts increased. This was partially offset by a decline in offshore activity. Results improved even more in the Middle East and Asia segment, where revenue grew 5% over Q3.

Interestingly, the company noted that growth in the Middle East were partially driven by strong fracturing activity on unconventional resources. I have been asked many times whether the fracking boom would spread internationally, and here Schlumberger seems to be confirming that it is. Specifically, the company noted that it performed eight multistage offshore fracturing jobs for Dubai Petroleum in a global first.

The supply and demand balance in the oil market tightened in the fourth quarter, as confirmed by a steady draw in OECD stocks, according to Schlumberger. As the December OPEC and non-OPEC agreements to cut production come into effect, the company expects these to “accelerate inventory draws, support a further increase in oil prices, and lead to increased investments” by exploration and production (E&P) companies.

Investment growth is expected to be led by land operators in North America, which continue to outspend their operating cash flow. North American investments are expected to increase by 30%, led (of course) by the red-hot Permian Basin. This increased activity is expected to translate into a recovery in service industry pricing, which is good for Schlumberger, but not so good for the E&P companies.

International E&P investments are expected to be more constrained by free cash flow considerations, and therefore to lag behind the U.S. trend. Globally, this will likely lead to a third successive year of underinvestment — and here is the money quote — “increasing the likelihood of a significant supply deficit in the medium term, which can only be avoided by a broad-based global increase in E&P spending.”

The company believes spending will kick into high gear in the second half of this year, and continue strong into 2018. We tend to agree. Please consider joining us at The Energy Strategist for our latest investment advice on Schlumberger, as well as the other companies throughout the oil and gas supply chain that we expect to benefit as the year unfolds.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)


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