uploads/2016/07/Segments-20.jpg

Inside Schlumberger’s Strategies as Crude Oil Prices Recover

By

Updated

Schlumberger’s revenue by segment

Schlumberger’s (SLB) Drilling segment witnessed the highest revenue decline (a 41% fall) in 2Q16 over 2Q15, closely followed by Reservoir Characterization (a 36.5% fall) and Production (a 31% fall).

In 2Q16, SLB added Cameron to its product group, following the acquisition of Cameron International on April 1. By comparison, Halliburton’s (HAL) 2Q16 revenues declined by 43% over 2Q15. Notably, SLB makes up 1.9% of ProShares Ultra Oil & Gas ETF (DIG).

Article continues below advertisement

Negative factors

On the negative side, the following affected SLB’s 2Q16 results:

  • lower priced services and products in SLB’s portfolio in North America
  • operational scale back in Venezuela
  • lower capex spending by upstream producers in Mexico and Brazil
  • integrated projects work decrease in Mexico
  • the end of various projects in Africa, along with declining rig count

These negative drivers, however, were partially stymied by the following:

  • fracturing-stage count increases and higher pressure pumping activities in the US shales
  • robust Schlumberger Production Management, or SPM, operations
  • resilient revenues from the Middle East

Segment margin analysis

Schlumberger’s Reservoir Characterization Group’s 2Q16 operating income margin declined to 17% from 26% in 2Q15 due to its lower share of high-margin Wireline & Testing services. The Production Group also experienced a huge operating margin decline from 2Q15 to 2Q16 (13% versus 4%). This was due to further pricing weakness in SLB’s pressure pumping services in North America, which was partially offset by new technology deployment and transformation program initiatives.

Article continues below advertisement

Year-to-date revenue and income

In the first six months of 2016, Schlumberger’s revenues declined by 29% to $13.6 billion over the same period in 2015. Its reported net loss also crashed to ~$1.7 billion in 1H16, as compared to $2.01 billion net income in 1H15. SLB’s 1H16 net income declined mostly on account of impairment and restructuring charges recorded in 2Q16.

Schlumberger’s strategies now

Schlumberger’s management aims to recover the pricing concessions and increase market share as crude oil prices started moving up. In the company’s 2Q16 earnings press release, SLB Chairman and CEO Paal Kibsgaard commented, “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.”

Next, we’ll discuss Schlumberger’s returns.

Advertisement

More From Market Realist