31.10.2016, 06:44
Schlumberger Announces Revenue Decreased 2% Eequentially
OREANDA-NEWS. Schlumberger Limited today reported results for the third quarter of 2016.
Schlumberger Chairman and CEO Paal Kibsgaard commented, “After calling the bottom of the cycle in the second quarter of this year, our business stabilized in the third quarter following a drop of more than 50% in pro forma revenue during the previous seven quarters. Over the same period, we have removed $6 billion from our quarterly cost base.
“Our third-quarter revenue decreased 2% sequentially, driven largely by the expected reduction in activity at Cameron as the order backlog of products declined. In spite of the challenging business environment, Cameron delivered strong financial results that were partly supported by excellent progress in the integration process.
“Excluding Cameron, revenue increased 1% sequentially driven by higher activity in the North America and Middle East Areas as well as in the Australia and Russia GeoMarkets. In North America, a modest increase in activity on land was partially tempered by lower offshore rig count in the US Gulf of Mexico. At the same time, increased activity during the peak summer drilling campaigns in Russia and new projects in the Middle East and Australia GeoMarkets were offset by continued weakness in Latin America, the North Sea, Sub-Saharan Africa and Southeast Asia.
“The solid nature of these results is apparent through incremental and decremental margin performance. The 12% sequential drop in Cameron Group revenue translated to a decremental margin of only 19% as a result of strong execution, accelerated integration, and effective cost control; while the 1% sequential increase in revenue for the remainder of the company leveraged strong execution and transformation effects to generate incremental margins north of 65%, excluding the effects of last quarter’s impairment charges.
“Among the business segments, the third-quarter revenue of the Reservoir Characterization Group increased 5% due to increased WesternGeco marine surveys in the North Sea, additional land seismic surveys in Saudi Arabia and Kuwait, solid progress on the early production facilities in Kuwait, and the seasonal increase of Wireline and Testing activity in Russia and Kazakhstan. Production Group revenue declined slightly by 1% as lower fracturing and completions activity in Latin America, the North Sea, and the Middle East was offset by increased fracturing activity on land in North America. Drilling Group revenue was also down by 1% due to the prolonged decline in deepwater activity in Sub-Saharan Africa, Brazil, and the Asia-Pacific region, which was only partially offset by the strong recovery in directional drilling activity in US land. Cameron Group revenue was sequentially lower by 12% primarily due to reduced product sales from a declining order backlog.
“Pretax operating margins improved 119 basis points (bps) to 11.6% in the third quarter as a result of steady progress of our transformation program, further streamlining of our global support structure, and early efforts in high-grading our contract portfolio. Margins were also partly boosted by the capacity reductions and asset impairments we made in the second quarter.
“Among the Groups, Reservoir Characterization pretax operating margin improved 292 bps sequentially to 19.1% while the Drilling Group margin increased 241 bps to 10.8% and the Production Group margin grew 41 bps to 4.7%. Sequentially, Cameron Group operating margin decreased 34 bps to 16.0% on the declining order backlog, although this was partially mitigated by strong project execution and cost controls leading to a decremental margin of only 19%. Diluted earnings per share of $0.25, excluding Cameron merger and integration charges, improved 9% sequentially.
“Free cash flow generation of $699 million in the third quarter was solid as inventory and capex investments remained tightly managed. However, working capital was negatively affected by lower than expected collections as we are now seeing widespread delays in payments from customers in all geographies. This is a clear sign of the persistent financial distress across the industry.
“In the global oil market, the supply and demand of crude is now more or less balanced as evidenced by flattening petroleum inventory levels and the start of consistent draws toward the end of the quarter—particularly in North America. At the same time, oil demand for 2017 was again revised upward in October and if combined with OPEC’s announced intention to cut production, this suggests further inventory draws in the coming quarters that should lead to upward movement in prices.
“In terms of 2017 E&P investment, visibility remains limited as our customers are still in the planning process. We maintain that a broad-based V-shaped recovery is unlikely given the fragile financial state of the industry, although we do see activity upside in 2017 in North America land, the Middle East and Russia markets. We are therefore ensuring that we are optimally positioned to capture a large share of this upside that we can subsequently turn it into positive earnings contributions.
“With the unparalleled cost and cash discipline we have established, we are confident in our capability to deliver incremental margins north of 65% and a free cash conversion rate above 75%. Going forward, this will give us significant flexibility to both re-invest in our business and steadily return cash to our shareholders. This capability, together with our unmatched scale and our unique ability to drive change throughout our company, clearly sets us apart from other industry players.”
Third-quarter revenue of $7.0 billion decreased 2% sequentially with North America declining 2% and international down 2%. Excluding Cameron Group results, third-quarter revenue increased 1% sequentially led by growth in the North America and Middle East & Asia Areas.
North America
In North America, overall revenue declined 2% sequentially. Excluding Cameron Group results, land revenue grew 14% sequentially through higher drilling and fracturing activity as the average US land rig count increased sequentially and fracturing stage count increased 17%. Pricing improvements were limited and much of the increase in land drilling activity in the US was driven by small North American independents. This increased volume of work was partially offset by unfavorable job and technology mixes. The land revenue increase was further offset by decreased Cameron Group sales such that overall land revenue increased by 5%. Offshore revenue decreased 13% sequentially due to a 9% average rig count decline in the US Gulf of Mexico, reduced WesternGeco multiclient seismic license fees, and lower Cameron Group Drilling sales on declining backlog orders.
International Areas
International revenue declined 2% sequentially due to continued pricing pressure across most GeoMarkets and reduced Cameron Group Drilling sales. In spite of this, robust activity improvements were seen in the Russia and Central Asia GeoMarkets on seasonal summer drilling strength as well as from new projects in the Middle East and Australia.
Revenue in the Latin America Area declined 1% sequentially as drilling and production activity in Brazil and Argentina declined on lower rig count while activity in Colombia and Venezuela remained subdued. The effect of this decline was partially offset by increased revenue in the Mexico & Central America GeoMarket on higher WesternGeco multiclient seismic license sales and Cameron Group sales.
Europe/CIS/Africa Area revenue decreased 4% sequentially, mainly in the Central & West Africa, Angola, and UK GeoMarkets where rig count decreased and projects were either completed or delayed. In Nigeria, a deteriorating security situation affected drilling and production activity while North Africa activity was muted. Revenue in the Russia and Central Asia GeoMarkets was strong as drilling peaked during the summer season and the Russian ruble strengthened.
Middle East & Asia Area revenue declined 1% sequentially. This was mainly due to lower activity in Indonesia, the UAE, and the South East Asia GeoMarkets as a result of continued customer budget cuts and project completions. In addition, Cameron Group Drilling sales in the Area also declined. However, the effect of these declines was mitigated by higher revenue in Saudi Arabia, Iraq and Kuwait on new projects, increased drilling activity, and additional land seismic surveys. Australia & Papua New Guinea GeoMarket revenue also increased as drilling activity began to recover following seven consecutive quarters of decline.
Schlumberger Chairman and CEO Paal Kibsgaard commented, “After calling the bottom of the cycle in the second quarter of this year, our business stabilized in the third quarter following a drop of more than 50% in pro forma revenue during the previous seven quarters. Over the same period, we have removed $6 billion from our quarterly cost base.
“Our third-quarter revenue decreased 2% sequentially, driven largely by the expected reduction in activity at Cameron as the order backlog of products declined. In spite of the challenging business environment, Cameron delivered strong financial results that were partly supported by excellent progress in the integration process.
“Excluding Cameron, revenue increased 1% sequentially driven by higher activity in the North America and Middle East Areas as well as in the Australia and Russia GeoMarkets. In North America, a modest increase in activity on land was partially tempered by lower offshore rig count in the US Gulf of Mexico. At the same time, increased activity during the peak summer drilling campaigns in Russia and new projects in the Middle East and Australia GeoMarkets were offset by continued weakness in Latin America, the North Sea, Sub-Saharan Africa and Southeast Asia.
“The solid nature of these results is apparent through incremental and decremental margin performance. The 12% sequential drop in Cameron Group revenue translated to a decremental margin of only 19% as a result of strong execution, accelerated integration, and effective cost control; while the 1% sequential increase in revenue for the remainder of the company leveraged strong execution and transformation effects to generate incremental margins north of 65%, excluding the effects of last quarter’s impairment charges.
“Among the business segments, the third-quarter revenue of the Reservoir Characterization Group increased 5% due to increased WesternGeco marine surveys in the North Sea, additional land seismic surveys in Saudi Arabia and Kuwait, solid progress on the early production facilities in Kuwait, and the seasonal increase of Wireline and Testing activity in Russia and Kazakhstan. Production Group revenue declined slightly by 1% as lower fracturing and completions activity in Latin America, the North Sea, and the Middle East was offset by increased fracturing activity on land in North America. Drilling Group revenue was also down by 1% due to the prolonged decline in deepwater activity in Sub-Saharan Africa, Brazil, and the Asia-Pacific region, which was only partially offset by the strong recovery in directional drilling activity in US land. Cameron Group revenue was sequentially lower by 12% primarily due to reduced product sales from a declining order backlog.
“Pretax operating margins improved 119 basis points (bps) to 11.6% in the third quarter as a result of steady progress of our transformation program, further streamlining of our global support structure, and early efforts in high-grading our contract portfolio. Margins were also partly boosted by the capacity reductions and asset impairments we made in the second quarter.
“Among the Groups, Reservoir Characterization pretax operating margin improved 292 bps sequentially to 19.1% while the Drilling Group margin increased 241 bps to 10.8% and the Production Group margin grew 41 bps to 4.7%. Sequentially, Cameron Group operating margin decreased 34 bps to 16.0% on the declining order backlog, although this was partially mitigated by strong project execution and cost controls leading to a decremental margin of only 19%. Diluted earnings per share of $0.25, excluding Cameron merger and integration charges, improved 9% sequentially.
“Free cash flow generation of $699 million in the third quarter was solid as inventory and capex investments remained tightly managed. However, working capital was negatively affected by lower than expected collections as we are now seeing widespread delays in payments from customers in all geographies. This is a clear sign of the persistent financial distress across the industry.
“In the global oil market, the supply and demand of crude is now more or less balanced as evidenced by flattening petroleum inventory levels and the start of consistent draws toward the end of the quarter—particularly in North America. At the same time, oil demand for 2017 was again revised upward in October and if combined with OPEC’s announced intention to cut production, this suggests further inventory draws in the coming quarters that should lead to upward movement in prices.
“In terms of 2017 E&P investment, visibility remains limited as our customers are still in the planning process. We maintain that a broad-based V-shaped recovery is unlikely given the fragile financial state of the industry, although we do see activity upside in 2017 in North America land, the Middle East and Russia markets. We are therefore ensuring that we are optimally positioned to capture a large share of this upside that we can subsequently turn it into positive earnings contributions.
“With the unparalleled cost and cash discipline we have established, we are confident in our capability to deliver incremental margins north of 65% and a free cash conversion rate above 75%. Going forward, this will give us significant flexibility to both re-invest in our business and steadily return cash to our shareholders. This capability, together with our unmatched scale and our unique ability to drive change throughout our company, clearly sets us apart from other industry players.”
Third-quarter revenue of $7.0 billion decreased 2% sequentially with North America declining 2% and international down 2%. Excluding Cameron Group results, third-quarter revenue increased 1% sequentially led by growth in the North America and Middle East & Asia Areas.
North America
In North America, overall revenue declined 2% sequentially. Excluding Cameron Group results, land revenue grew 14% sequentially through higher drilling and fracturing activity as the average US land rig count increased sequentially and fracturing stage count increased 17%. Pricing improvements were limited and much of the increase in land drilling activity in the US was driven by small North American independents. This increased volume of work was partially offset by unfavorable job and technology mixes. The land revenue increase was further offset by decreased Cameron Group sales such that overall land revenue increased by 5%. Offshore revenue decreased 13% sequentially due to a 9% average rig count decline in the US Gulf of Mexico, reduced WesternGeco multiclient seismic license fees, and lower Cameron Group Drilling sales on declining backlog orders.
International Areas
International revenue declined 2% sequentially due to continued pricing pressure across most GeoMarkets and reduced Cameron Group Drilling sales. In spite of this, robust activity improvements were seen in the Russia and Central Asia GeoMarkets on seasonal summer drilling strength as well as from new projects in the Middle East and Australia.
Revenue in the Latin America Area declined 1% sequentially as drilling and production activity in Brazil and Argentina declined on lower rig count while activity in Colombia and Venezuela remained subdued. The effect of this decline was partially offset by increased revenue in the Mexico & Central America GeoMarket on higher WesternGeco multiclient seismic license sales and Cameron Group sales.
Europe/CIS/Africa Area revenue decreased 4% sequentially, mainly in the Central & West Africa, Angola, and UK GeoMarkets where rig count decreased and projects were either completed or delayed. In Nigeria, a deteriorating security situation affected drilling and production activity while North Africa activity was muted. Revenue in the Russia and Central Asia GeoMarkets was strong as drilling peaked during the summer season and the Russian ruble strengthened.
Middle East & Asia Area revenue declined 1% sequentially. This was mainly due to lower activity in Indonesia, the UAE, and the South East Asia GeoMarkets as a result of continued customer budget cuts and project completions. In addition, Cameron Group Drilling sales in the Area also declined. However, the effect of these declines was mitigated by higher revenue in Saudi Arabia, Iraq and Kuwait on new projects, increased drilling activity, and additional land seismic surveys. Australia & Papua New Guinea GeoMarket revenue also increased as drilling activity began to recover following seven consecutive quarters of decline.
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