Changes come and changes go: Schlumberger, still in the pole position

The stage was Scotia Howard Weil 2016 Energy Conference on 21 March. Paal Kibsgaard, Chairman and CEO of Schlumberger, was there again to speak, calm the waters and reassure everyone that, despite a few bumps on the road, the well oiled machine that is Schlumberger was still on track. New Orleans was familiar ground for the speaker this being his second presentation there. He started off by thanking Scotia Howard Weil and Bill Sanchez (analyst at Scotia Capital) in particular for the opportunity. Then, it was off to the races. The three main hot topics on the agenda were the current industry challenges, the new commercial and collaborative model between operators and service companies, spearheaded by Schlumberger, and lastly, conclusions on the market outlook for short and medium term. But, as always, these are just previsions, best case scenarios, and definitely not set in stone. Let’s see how it all played out.

The first topic of discussion was E&P industry. Paal Kibsgaard stated that the industry finds itself in the deepest financial crisis on record. Profitability and cash flow are at unsustainable levels for most oil and gas operators, a fact that in turn has put the service industry in a difficult spot. And when the pressure was on, the service industry reverted to age old practices like halting investments in exploration, aggressively curtailing development activity and squeezing service industry prices. But this is a new kind of crisis and it demands new measures. The main difference here is that we are unlikely to see oil prices returning to the 100 dollars level because this downturn is not driven by lower demand and external factors. It is in fact a result of OPEC’s decision to protect market share rather than oil price. In Paal Kibsgaard opinion this generates a ‘medium-for-longer’ oil price scenario. So what exactly needs to change in order for this situation to be overcome? The team at Schlumberger think that they have the answer. “The combined capabilities of the E&P operators and the leading service companies have the potential to realize the required performance upside for the industry” stated Paal Kibsgaard. But all is not so easy. This means the companies have to be willing to change the existing commercial model of the late 1990s. And that is no easy feat. The procurement driven approach presents three problems: a failure to drive forward a sufficient rate of intrinsic performance improvement, a highly fragmented approach to technology system innovation and system performance and a lack of concept design phase collaboration between operators and suppliers. Having explained this, Schlumberger made its case for change. And it is as follows.
The three pronged approach features the improvement of intrinsic performance of processes and workflows including internal support functions as well as external product and service delivery. A number of phases that have been underway for a couple of years have yielded results in HSE, quality, capex intensity, and free cash flow in spite of the challenges in the industry. And the coming years still hold potential for development. The second form of action will be to accelerate the rate of technology system innovation and this is where the merger with Cameron comes in. This will give Schlumberger unrivalled technology capability. The final step in this stage meant establishing a lead position in ESP and gas lift markets augmented by acquisitions in rod lift and progressive cavity pumps in order to build a complete life of well artificial lift solutions. The third approach focuses on the deployment of more aligned business models where risk and reward are shared between operators and service companies throughout the life of the oil field. The SPM (Schlumberger Production Management) was highlighted as the best form of integration and the best offer in terms of full field management, products, services and technical expertise. Thanks to the expansion of this model, today the company manages around 250,000 barrels per day of oil production. As they put it this is a win-win situation both for them and their partners.
The last point on the agenda was the discussion about the market outlook. Paal Kibsgaard explained that there have been three different phases of the downturn that has persisted in the last 17 months and that the third and most severe phase is taking place in this very quarter. He claims that Schlumberger has successfully managed to overcome this as a consequence of balancing margins and market share and by aggressively reducing their global capacity. They have also steadily improved their intrinsic performance through their ongoing transformation program. However, they still expect to take a hit which will produce a 15% drop in revenue and further weakening in the second quarter. But going further they promise to continue to tailor cost and resource levels to activity in order to protect financial strength. Still Paal Kibsgaard is optimistic about the medium-term outlook for Schlumberger and this is why: E&P investments cuts are so severe they can only accelerate production decline and growth of prices, the company can operate longer than most due to their solid cash flow and balance sheet, they have used this downturn to further strengthen their position in the industry, once activity resumes temporary international pricing cuts should be restored and the medium-for-longer oil price environment should drive greater collaboration and alignment.
In this very scenario, Schlumberger is in the perfect position to lead the way. All things considered, even if this scenario doesn’t come to fruition, the company still has an ace up their sleeve: the 14.8 billion dollar merger deal with Cameron. Paal Kibsgaard is optimistic about this merger and postulates that the deal will be closed by the end of the first quarter of 2016.

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