Upstream Operators’ Capex Could Impact Schlumberger’s Margin

In the past few years, some major US upstream and integrated companies reduced the capital expenditure after the sharp fall in crude oil prices. From 4Q16 to 1Q17, 19 of the most prominent names in the industry slashed the capex 21%. Lower upstream capex resulted in lower prices for OFS (oilfield equipment and services) companies’ services and products, which reduced OFS companies’ operating revenues and margins.

As you can see in the above graph, Schlumberger’s (SLB) EBITDA (earnings before interest, tax, depreciation, and amortization) margin was impacted negatively as upstream companies slashed their budgets. From 1Q16 to 1Q17, Schlumberger’s EBITDA margin fell to 22% from 27%.

From 4Q16 to 1Q17, Schlumberger’s EBITDA margin recovered. During the same period, 11 of the most prominent OFS companies’ average EBITDA margins more than doubled. The EBITDA margin is a measure of a company’s operating earnings. Schlumberger accounts for 5.9% of the iShares North American Natural Resources ETF (IGE).

Patterson-UTI Energy’s (PTEN) EBITDA margin was 22.5% in 1Q17. In 1Q17, Core Laboratories’ (CLB) EBITDA margin was ~19%. National Oilwell Varco’s (NOV) EBITDA margin was 4.5% in 1Q17.

In the next part, we’ll discuss Schlumberger’s debt.