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Schlumberger's Kibsgaard: Sluggish Frac Activity Offset by Sand Biz

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Schlumberger reported results for the third quarter of 2018. Below are highlights from its conference call and report.

Sand Fleet Offsets Low Frac Activity, But 'No Further Plans' to Invest

Low frac activity was offsett by robust performance from SLB's vertically integrated sand business, which in addition to serving OneStim now also competes in the third-party market. Offshore North America, drilling activity was impacted by scheduled platform maintenance and planned workover operations, the combination of which led to a less favorable activity mix for Schlumberger.

• Kibgaard said: "We don’t have anymore sand mines that we are looking to buy at this stage. We are where we need to be. There is now a flurry of individual sand bids which we can also participate in using the investments and the capacity that we have already sunk in. But we have no plans on investing further into this."

Schlumberger Strategy Regarding Sand

Barclays David Anderson posed this question:

• "I was wondering if you could just talk, expand a little bit more about your strategy regarding sand and proppant in the U.S. land market. My understanding is you acquired another Permian sand mine during the quarter? And then you talked about third-party sales during the quarter. Can you just kind of talk about, I mean, I would assume a big part of this is to ensure your supply chain for kind of maximizing utilization on your pressure pumping, but what else is this for?"

Kibsgaard responded: "Now, since then we have seen an emerging trend from our customers, who have also seen that there is a lot of inflation in this part of the value chain to the point that are starting to break at the way they bid the frac work up into individual products as well as services. This has always been integrated in the past, where the frac company is the one that basically handles the supply chain for sand. But at an increasing pace, we see a separation of sand and service in terms of how the work is bid out. So, in this process, we have stepped up a bit further, our investments into the value chain to the point that we are now pretty much self-sufficient. On sand, we have a pretty good fleet when it comes to last mile and we have also bought mines which are fairly closely associated with where we do most of our activity."

US Market 'Balancing Act' - Temporary Lay Down of Frac Crews

• US Onshore 'tight market' due to lower frac activity and Permian constraints

• Reduced activity 'more of a pause than a long-term issue'

In its Q3 conference call, CEO Paul Kibsgaard commented: "Onshore U.S., it is a tight market obviously for the coming quarter or two. On the frac side, there is lower activity in which case some of the crews that we have operating today we will need to temporarily lay down. So, it’s a balancing act and this is just the nature of the very dynamic U.S. land market and that’s something we are used to dealing with and we are dealing with as best we can.

"So, what we have decided for the course of Q4 is to actively try to reduce the variable part of our cost base, but we aren’t going to do any significant adjustments to the structure, because what we see in the outlook for hydraulic fracs is that there is going to be a couple of quarters where there will be lower activity, but this is more of a pause than I would say a long-term structural issue. Whether this is Q4, Q1 or it lingers into Q2 I think is to be seen."

Other Plays Seeing No Upswing / Decrease in Activity

No change in activity in plays outside the Permian.

• Kibsgaard commented: "No, we have not seen any major shift in the activity projections for the other basins. So, I think that’s going to be continuing along the path that we already had established whether this is the Northeast Bakken, Haynesville or Eagle Ford. So, no real change to that."
  

North America Summary

North America Area consolidated revenue of $3.2 billion increased 2% sequentially due to robust growth of Drilling products and services on land, which grew 5% sequentially outperforming the 3% increase in US land rig count.

Growth was driven by the continued demand for rotary steerable systems in horizontal wells. Higher product sales of artificial lift systems also contributed to the Area’s performance. Revenue from OneStim hydraulic fracturing, however, was increasingly impacted by softening activity and pricing over the course of the quarter. This impact was fully offset by robust performance from our vertically integrated sand business, which in addition to serving OneStim, now also competes in the third-party market.

The dynamics of the pressure pumping market changed this quarter and activity will likely continue to decline until the Permian takeaway capacity is resolved. Accordingly, OneStim did not deploy additional hydraulic fracturing fleet capacity during the quarter. North America Offshore revenue decreased 1% as drilling activity was impacted by scheduled platform maintenance and planned workover operations, the combination of which led to a less favorable activity mix. Cameron revenue was higher sequentially as increased sales in Surface Systems were partially offset by lower revenue in OneSubsea and Valves & Measurement.

Earnings Highlights - Sees Gains Despite Sluggish Frac Activity

• Revenue of $8.5 billion increased 2% sequentially

• Pretax operating income of $1.2 billion increased 5% sequentially

Schlumberger Chairman and CEO Paal Kibsgaard commented, “Our third-quarter revenue of $8.5 billion grew 2% sequentially, driven by the International Areas where the broad-based activity recovery continued and where sequential revenue growth outpaced that of North America for the first time since the second quarter of 2014. In North America, sequential growth remained positive but slowed from the rates of previous quarters as takeaway constraints in the Permian impacted hydraulic fracturing activity.

“While the current Permian takeaway constraints in North America should be addressed within the next 12 to 18 months, a series of reservoir- and production-related challenges is emerging in the US shale basins that could dampen the most optimistic production growth projections."