Major Oil and Gas Service Companies Release Earnings

This week is highly significant as we saw a substantial amount of publicly traded oilfield service companies release Second Quarter earnings. More important than how much money any company made or lost is their market outlook that accompanies these reports.

Halliburton Earnings

On July 20, 2016 Halliburton released earnings. Halliburton reported a loss of $0.14 per share. (http://ir.halliburton.com/phoenix.zhtml?c=67605&p=irol-newsArticle&ID=2186651. In the same period last year, Halliburton reported positive earnings of $0.44 per share. In its press release, CEO David Laser spoke about the North American Market. Specifically, Mr. Laser stated:

Our second quarter results showed resilience in the face of another challenging quarter marked by lower activity levels and continued pricing pressure around the globe. North America revenue declined 15% sequentially, significantly outperforming the average US rig count, which was down 23%. After falling 78% from the November 2014 peak, the US rig count reached a landing point during the second quarter, as we predicted during our last earnings call. Since reaching the bottom, the rig count has improved by 26 over the last several weeks, reflecting operator confidence in stabilizing commodity prices…We believe the North America market has turned. We expect to see a modest uptick in rig count during the second half of the year. With our growth in market share during the downturn, we believe we are best-positioned to benefit from any recovery, including a modest one. Internationally, we are maintaining our service footprint, managing costs and continuing to gain market share.

FMC Earnings

Also on July 20, 2016, FMC released earning in which they reported positive diluted earnings of $0.22 per share. Subsequently, on July 21, 2016, FMC’s John Gremp - Chief Executive Officer, Maryann Mannen - Chief Financial Officer and Doug Pferdehirt - President and Chief Operating Officer participated in a conference call in which they gave their market outlook for the rest of the year and beyond (transcript available at www.SeekingAlpha.com). CEO Jon Gremp noted the following. First, FMC’s subsea business remained strong, while the surface continued to be weak and segment results were most negatively impacted by North America. Mr. Gremp noted that there was been a dramatic pullback in energy investment that will impact global production (U.S. has declined nearly 8% already from its peak). Speaking of a potential recovery, Mr. Gremp offered the following insight:

Oil and gas prices are now up more than 70% from the low levels reached in the first quarter. While they remain far below the prior peak, higher prices should improve operator cash flows. Confidence in the sustainability of those cash flows remains a key factor to moving capital spending higher. As confidence improves we anticipate spending will follow.

Capital budgets though reset during recent commodity lows continue to drive near-term spending lower.

Long-term outlook is much different as the current pace of activity is just simply not sustainable. Even if global demand stays flat, the lack of investment will create a production shortfall that will ultimately reverse the spending cycle. Prices will respond. Cash flows will improve and this will boost operators' confidence. Capital spending will follow and in that environment shale will go back to work first.

Shale has the advantage of smaller upfront capital commitment and offers a faster payback to the operator. This activity increase will benefit our surface business in North America. We're also confident that deepwater investment will soon follow. Deepwater remains a critical component of global production and it is a necessary source of future hydrocarbon supply.

FMC executives noted that many of their customers concur with the beliefs expressed above. Finally, Mr. Pferdehirt stated that there is potential for nearly 20 large subsea projects to be awarded over the next 24 months.

Schlumberger Earnings

On July 21, Schlumberger released earnings. Schlumberger announced adjusted earnings of $0.23 per diluted share, above analysts’ expectations of $0.21. However, unadjusted, Schlumberger actually lost $2.16B, compared to a profit of $1.12B a year ago.

In its press release announcing earnings Schlumberger Chairman and CEOPaal Kibsgaard commented, "In the second quarter market conditions worsened further in most parts of our global operations, but in spite of the continuing headwinds we now appear to have reached the bottom of the cycle.”  Despite his belief that we have reached the bottom of the cycle, Mr. Kibsgarrd further stated that he expects the downturn will persist through 2016. Speaking of what is to come, Mr. Kibsgaard stated:

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.

At the same time, the effects of the cuts that we have seen in E&P spending are now clearly visible in falling oil production, and with demand remaining strong, we are heading more rapidly towards an increasing negative gap between global supply and demand for oil. This will require significant capability and capacity to reverse, and without pricing recovery the service industry will be challenged to deliver.

Whatever shape the recovery takes, service pricing must rise while respecting the need for operators to control their costs in what will likely be a medium-for-longer oil price environment. This provides an opportunity to share the additional value that can be mutually created through collaboration and integration. We will therefore continue to develop the way in which we operate as a company as well as the nature of the work that we undertake, making sure we remain at the forefront of an industry that increasingly needs fundamental change."

To read the entire press release from Schlumberger, click here: http://investorcenter.slb.com/phoenix.zhtml?c=97513&p=irol-newsArticle&ID=2187325

Oceaneering Earnings

Also on July 21, 2016, Oceaneering released earnings. The company said its earnings dropped to $26.84 million, or $0.27 per share. This was down from $75.22 million, or $0.76 per share in Q2 of 2015. Unfortunately, in the press release, CEO M. Kevin McEvoy offered little guidance on future expectations except to say that he believes the second half of 2016 will be weaker than the first half. To read the entire press release click here: http://www.oceaneering.com/wp-content/uploads/2016/07/PR-07-21-16-Q2-2016-Release.pdf

GE Earnings

On Friday, July 22, 2016, GE released earnings. In its earnings webcast, GE executives addressed the Oil and Gas Segment. GE had earnings per share of $0.51. In discussing the O&G Segment, GE executives made the following points:

• The O&G segment faces continuing market pressure and headwinds. GE expects the Second half of this year to be better than the first and believes they will receive projects in the second half of this year that will build backlog for 2017. Overall they see Frist half down 18%, second half down 7% and an overall -12% for the year.
• CAPEX in O&G for 2016 is down 40% for North American Independents.
• Orders in the Quarter were down 34%.
• Backlog for the Quarter ended at 22.7 billion, up 1% from the First Quarter but down 7% from Second Quarter of last year.
• Year over year equipment backlog was down 31%, but the services backlog is actually up 15%.
• Revenues in the quarter of $3.2 billion were down 22%.

Operating profit of $320 million was down 48% vs 2015 driven by lower volume and negative fixed cost leverage.