It’s my favorite time of year again – Earnings Season!!!! Sometimes its more like Christmas, sometimes its more like Halloween – but like both holidays it is always full of surprises!
Like the last time Big Service and Big Oil released earnings, I combed the transcripts from their executives for the key nuggets. While I will provide more info for you detail junkies, I highlight the most salient points!
Also, this week we have Halliburton, Schlumberger, and Baker Hughes. The Newsletter deadline cut off before we got NOV, FMC, and Oceaneering. Stay tuned next week for a special update on those earnings. Full transcripts are available at www.seekingalpha.com.
On October 19, 2016, Halliburton Execs had a conference call to report earnings. CEO David Lesar, CFO Mark McCollum, and President Jeff Miller were on the call. Earnings beat expectations showing adjusted diluted earnings per share of $0.01 on revenues of $3.83 billion as opposed to an consensus estimated loss of $0.07 per share that wall street expected.
Key points from the earnings conference call were as follows:
- North America revenue grew 9% for the period, representing the first revenue increase in seven quarters. Results improved as we took advantage of the rig count growth by focusing on increasing utilization and working our surface efficiency model.
- The average U.S. rig count increased 14% over the quarter, driven primarily by rig additions to smaller operators where we saw a trend of less service intensive wells, which is not activity typically worth chasing at today’s pricing.
- As the markets stabilize, our primary focus will now switch to improving our margins while maintaining that market share. In the U.S., we believe we now have the highest market share we’ve ever had. And at this point, if we have to give some of it back to move margins up, we might take that approach.
- We remain steadfast in our belief that significant activity increases from our customers starts with sustainable commodity prices over $50 per barrel, which we haven’t seen in any meaningful way yet since the rig count activity bottomed out.
- Now, looking ahead to the fourth quarter on North America land, activity levels are difficult to call at this point. Based on current customer feedback, we remain cautious around customer activity due to holiday and seasonal weather related downturns. Our customers may take extended breaks, starting as early as Thanksgiving and push additional work to the first quarter of 2017.
- I expect the international markets to slowly grind downward due to the lower commodity price environment.
- We expect to see a bottoming of the international rig count in the first half of 2017. Land-based mature field activity should lead the international recovery, while we expect the deepwater complex to remain so severely challenged for the foreseeable future.
- As we have said before, unconventional, particularly those in North America are leading their recovery in activity, providing the optimal combination of short cycle returns and fastest incremental barrel to market. Mature fields continue to be resilient given their relatively low lifting cost. And finally, deepwater remains structurally challenged with higher costs and long duration project characteristics.
- As we have said for some time, North America has assumed their role of swing producer in global oil production. Because of this shift away from production discipline, which was historically created by OPEC, our industry will likely experience shorter commodity price cycles going forward. So, we see the future market as a combination of shorter cycles and range-bound commodity prices. In that environment, it is imperative that we returns-focused companies like Halliburton be more asset-light.
- So, let’s start with North America. While the supply and demand balance for U.S. onshore services is heading in the right direction, we are still in an oversupplied equipment market.
- [Speaking about increasing Halliburton’s margins and equipment utilization in markets], “We believe the activity levels in the Permian and others all are serving to work equipment harder, it’s going to tighten up equipment faster and we’re starting to see price against the edges and we’ll continue to drive that forward as we hold the line of cost and it’s -- we’re going to get there. The model is the same and we’ve just got to execute.”
- [Speaking about the increased rig count and why Halliburton hasn’t reaped more benefit]: The rigs that we’re seeing, as you describe them are probably less service intensive and they have also tended to be less about big new capital programs and more around -- and what we’ve seen has been more around repairing or trying to sustain a bit of production, which looks and feels quite a bit different.
Schlumberger reported earnings on October 20, 2016. Schlumberger had earnings per share of $0.25, beating consensus estimates by $0.03 per share on revenue of $7.02 billion (-17.1% year over year) and therefore missed consensus projected earnings by $60 million. On October 21, 2016, Schlumberger had their earnings conference call, which was led by Chariman & CEO Paal Kibsgaard. Key points made by the various executives were as follows:
- [Speaking about Cameron’s revenues] “Typical lead times in these businesses range from three weeks to nine months and we expect to see revenue flattening future quarters and begin to grow again in mid 2017 as onshore activity picks up around the world.”
- [Speaking of Cameron and OneSubSea] “These two businesses are now entering a period of revenue decline as our backlog has fallen for seven straight quarters. We are now entering the base of the downturn that the other Schlumberger businesses have experienced over the past 18 months.”
- [Speaking about the downturn and his prior prediction that we had hit bottom], Kibsgaard said, “After seven quarters of unprecedented activity decline, the business environment stabilized as expected in the third quarter, confirming that we have indeed reached the bottom of the cycle.”
- [Speaking of Q3 Results] In North America, revenue for the Characterization Drilling & Production Groups increased 3% sequentially as solid growth on land was largely offset by a further revenue reduction in the Gulf of Mexico, Alaska and Eastern Canada impacting all product groups. The strong growth on land was driven by the U.S. with acute rig count increased significantly and with more than half of the rigs being added in the Permian Basin.
- [Speaking of Latin America]. However the two year activity slide was clearly slowing during the quarter and we believe we have now reached the bottom of the cycle also in Latin America. The sequential revenue drop came entirely from the drilling and production…
- Kilsgaard notes he expects a pickup in the early part of 2016 for Mexico in shallow waters, Ecaudor is continuing development plans, as is Argentina and Brazil. He expects $50.00 per barrel oil will spur more development in Columbia. And he hopes that a new agreement with Venezuela that gives more payment assurances will allow increased cooperation there.
- [Speaking of Europe and Africa] “Revenue in Europe, CIS, and Africa declined 3% sequentially excluding the Cameron Group while strong sequential growth in Russia and flat activity in the North Sea and North Africa was more than offset by a further reduction in activity throughout sub-Sahara Africa.”
- Speaking further of Europe and Africa, Mr. Kilsgaard said that he suspects Q4 will show the normal seasonal slowdown associated with weather, but they believe they have reached the bottom of the cycle in this region.
- [Speaking about Deepwater and One SubSea], “It's continued to be challenged and in this quarter we saw five additional rigs get stacked. They are in Q3 and deepwater rig utilization dropped to 55% in the month of September. So you expect 2016 deepwater drilling activity as a whole to be down 33%.
- But he did note there are 5-8 bids in the pipeline for new projects that could begin in 2017 for deepwater.
Speaking about the Macros of the current oil market, Mr. Kilsgaard said the following:
Turning now to the oil macro, the supply and demand of crude is now more or less in balance as seen by the flattening global petroleum inventories and the start of consistent growth towards the end of the quarter in particular in North America. In addition, oil demand was again revised upwards in September and is now forecasted to be around 1.2 million barrels per day for both 2016 and 2017.
At the same time global supply is plateauing as non-OPEC production continues to experience significant declines and even offsetting record production levels from OPEC in September. Based on current investment levels, we believe that 2017 non-OPEC production will at best be flat and any production outside from the U.S., Canada and Brazil will be offset by further declines in the rest of the global production base.
Given the projected demand growth, this means that the call on OPEC will increase from the current record production levels, suggesting that the production outside from Nigeria, Libya and Iran may be needed to keep the markets in balance.
All of this means that the period of oversupply and inventory build is over and that market segments should soon change, paving the way for an increase in oil prices and subsequently E&P investments. There is also a case to be made for a more rapid role on the global oil inventories and a more bullish outlook for the oil price in the event of a lower production upside from Libya, Nigeria and Iran OPEC and Russia implementation of production cuts for a steeper decline in non-OPEC production.
In terms of the 2017 E&P investments, details are still limited. However we maintain that a V-shaped recovery is unlikely given the fragile financial state of the industry. Still we do see upsides in 2017 in North America land, the Middle East and Russia and we are making sure, we are optimally placed to capture a large share of this upside and importantly turn this additional activity into positive earnings contributions.
Baker-Hughes reported a loss if $0.15 pr share, which actually beat analysts expectations of a loss of $0.45 per share. Revenue was $2.4 billion as opposed to consensus estiamtes of $2.41 billion. On October 25, 2016, BH had an earnings conference call. The following were the key points made by the executives on the call:
- BH is engaged in an interesting project to outsource some of their less profitable geographic areas. It appears that the philosophy is to create a distribution network of independent companies that buy their products and then win local contracts. I note this because its an interesting model in the face of consolidation – it seems they are doing almost the opposite by encouraging startups in some areas that can basically be their distributors.
- [Speaking about deepwater market and what the price of oil needs to make offshore production profitable] We still have a very positive view on a dollar per barrel recovery cost. It makes all the sense in the world, but at these commodity prices, I think my customers in West Africa need about $65. I think it's probably about $55 in the North Sea, and I think it's about the same in the Gulf. And until we see that, as we've said before, you just have to have some period of stability for them to come back. The nice thing about that market, as you know, is the focus on technology, reliability, quality. That's right up our alley, so we're participating in managing our costs until that starts to recover.
- Mr. Craighead (CEO) does not predict Gulf of Mexico getting better until probably mid-2017.
On market perspective:
As we said in July, and reiterated again in September, we continue to believe that oil prices in the mid to upper 50s are required for a sustainable recovery in North America. Our customers also need to be more confident on the durability of those oil prices before making any significant change to their spending patterns. As we previously projected, the North American market has been continuing to grind slowly upward and we expect that to continue. In order for a broader recovery to take place, a series of milestones need to be reached before the market can respond in a more predictable way.
First, supply/demand surplus has to rebalance, allowing commodity prices to improve. Second, those commodity prices need to stabilize for confidence in the customer community to improve and their investment to accelerate. And third, activity needs to increase meaningfully before service capacity can be substantially absorbed and pricing recovery take place. Until then, we will continue to see this dislocation we have today in the relationship between commodity prices and services pricing.
In North America, we have seen a recent shift in land activity from what was predominantly small private operators adding rigs opportunistically to include larger, more established E&P companies. While we've seen customers growing more optimistic about the industry outlook, volatility and uncertainty remain. We expect the ramp up to remain slow and pricing to remain challenging. And as a result, we expect only modest growth in the fourth quarter in North America.
Internationally, we see activity declines and pricing pressure continuing in the near term, and with customers controlling spending, we don't expect year-end seasonal product sales to offset those declines. In Africa, where we have a significant deepwater drilling position, we expect our revenue to further decline as a result of ongoing reductions in deepwater activity. Additionally in Norway, we expect to see a sequential revenue reduction as a result of the recently resolved local strikes which impacted the first two weeks of the fourth quarter.
Conversely, in the Middle East/Asia Pacific region, we expect to see growth opportunities in Kuwait, the United Arab Emirates, India and Oman. And in Saudi Arabia, we continue to fortify our position with a focus on flawless execution across our full suite of product lines.
And finally in Latin America, we expect the overall market to remain relatively flat, although a one-time product sale in Colombia during the third quarter will create a sequential headwind.
Now as we look ahead, it's also worth reiterating the obvious, that the oil and gas ecosystem remains fragile and susceptible to shocks from headlines, difficult (11:18) policy changes, currency fluctuation and geopolitical dynamics. And as I've said previously, the difference in this cycle is the more prominent role of the North American shale producer, who can achieve production growth and get it into the pipe far faster than conventional producers. As such, the elasticity of the unconventional segment could act as an effective ceiling on the commodity price.
So while we remain optimistic about recovery's prospects, we are positioning the company to prosper in a lower for longer market environment. In simple terms, that means delivering solutions to our customers that result in more efficient wells, optimized production and improved recovery.
North America's activity bump is because a significant amount of the deflation that's come off of our backs and our competitors' backs. That isn't going to be there forever. And as we're just talking to Dan around some of the technology, we're getting tapped out in North America. And so that's a response in the market that's because of our costs coming down. So it's not that the fundamentals of I think our customer community being able to really make money at $50 oil. It's because we're giving up too much of the economic rent. And that's going to go away eventually.
Internationally, I hate to say this, Jim. If we don't see $55 oil in the North Sea, it's not coming back. And I think we need $65 in West Africa. Russia is staying steady, I think for reasons that is really around production level mandates versus pure economics. Parts of the Caspian and so forth are flat to trending down. Now Middle East definitely continues to be a bright spot. And it gets back to low cost producer wins in this market, so substantial I think. I don't think I'm exaggerating when I say substantial opportunity in Kuwait, Saudi, the United Arab Emirates and so forth. Oman. But besides that, if we don't get a lift in oil prices that's durable beyond just a few days or weeks, I don't see the rest of the world coming back in any meaningful way.
By: Ty Chapman
Five Star Metals, Inc.
Raising the Bar for Customer Service and Quality
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