After several quarters of waiting for Schlumberger (NYSE: SLB) to produce a significant uptick in earnings, that increase finally arrived in the third quarter as the company made some significant strides in the North American shale drilling market . That was especially encouraging since Schlumberger was traditionally an internationally focused company.
On top of the better-than-expected results, management had some interesting comments about where the industry is headed and how the company plans to respond. Here are several quotes from Schlumberger’s most recent conference call that encapsulate management’s views on the future.
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Back to work
Schlumberger and other oil services companies have noted previously that their lower levels of profitability had a lot to do with poor pricing power and idle equipment. According to Patrick Schorn, EVP of new ventures, this situation is starting to change in North America and is leading to better results:
Over the past two quarters, we have more than doubled the number of active frack fleets in North America and we have at present deployed close to all of our idle capacity in preparation for the additional capacity that will become available after closing the OneStim transaction with Weatherford [International] . While the strength in our hydraulic fracturing activity combined with market share gains and continued pricing traction drove significant sequential revenue growth for the production group in North America land, it also inevitably led to some transition-related costs and inefficiencies resulting from the rapid ramp-up and activity which impacted incremental margins.
As the company’s idle fleet is put to work and there are fewer transition or reactivation fees, we should see some of the revenue gains from the previous quarters translate to bottom-line results.
A shift in thinking for the industry
For decades, there has been a distinct split between service providers and equipment manufacturers. The reason for this division was that producers wanted to procure their own equipment and use the service provider of choice. Today, though, the lines between service providers and equipment manufacturers have become blurrier by the day as the major services companies have started to incorporate more equipment manufacturing into their business models.
As a result, companies like Schlumberger have changed their approach as to how they sell and market their offerings to producers. Here’s CEO Paal Kibsgaard describing why the change is happening and what Schlumberger is doing to adapt to this situation:
With the complexity of today’s oilfield operations and the advances made in other industries in terms of total system performance, it is clear that replacing our industry’s fragmented approach with a new focus on complete technology systems holds a massive performance upside. In response to this, we have over the past seven years continued to build out our technology offering in terms of hardware, software, and domain expertise, where we today have the ownership and technical capabilities to develop these complete technology systems.
A global pickup is underway
Throughout this most recent downturn, Kibsgaard has been one of the more pessimistic voices out there on the eventual recovery in the oil and gas industry. While he didn’t doubt that it was coming eventually, he thought it was just going to take a while.
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This past quarter, though, his tone started to change, and now he foresees an industry turnaround that should happen relatively soon:
[W]e are seeing signs in many parts of the world of conventional line and off-shore projects now being prepared for [final investment decision] and the total number of FIDs this year is double that of 2016. It is also worth noting that our overall tendering activity in the international markets is also up by over 50% in 2017 compared to last year measured in total contract value. We expect these positive trends to strengthen further in the coming quarters. Based on a combination of all these factors we are turning increasingly positive on the overall outlook for our global business. It is still early to say what the specific impact on the 2018 E&P spend will be as our customers are now in their planning process. We do expect activity tailwinds in most parts of the world in 2018.
Becoming a producer as well?
On top of the now-blurring lines between the various parts of the oil services business, Schlumberger has taken it a step further with its Schlumberger Production Management program, which will do almost all of the work for a producer. Sometimes the program goes so far as to provide financing for producers. This past quarter, the company took that program one step further by acquiring 800,000 acres of oil and gas drilling rights from Cenovus Energy in an agreement with private partner Torxen Energy.
With such a large stake in producing, several analysts on the call had questions as to how much management expects this part of the business to grow. According to Kibsgaard:
SPM will not alter the face of Schlumberger, it will simply complement our core business where the objective is to grow SPM from the size of the product line today to the size of a group over the next five to seven years. Granted, SPM has a different risk profile compared to our core business but different does not mean higher. The biggest risks to our full cycle returns in the core business is first the huge cost of scaling and scaling down capacity in an increasingly volatile business environment. Second, failing to adjust our business approach in some of the large but commoditized land markets around the world. Faced with these challenges we have concluded that a strategy of doing nothing new is simply not a strategy. The SPM business model and contract duration significantly mitigate both of these core business risks while in return we take on the reservoir risk and in certain cases higher counterparty risks.
What a Fool believes
Schlumberger’s results are on the upswing — although maybe not as much as one of its largest competitors . With North American drilling chugging along at a steady pace and the international market no longer contracting, the company could be in for a long stretch of revenue growth. It will be interesting to see how the company’s new approach of providing a wider array of equipment and services to a project fares, and it’s something that investors should have an eye on in coming quarters.
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