Schlumberger Earnings Slip on Low Crude Prices
Oil company plans future job cuts in plan to fuel margin growth
Crude prices wreaked havoc on Schlumberger’s third quarter results as the oil giant’s primary customers, oil exploration and production companies, cut back on capital expenditure and rig activity.
In a press release issued after market close on Oct. 15, the world’s largest oilfield services company reported revenues of $8.47 billion, nearly just a third of revenues in Q3 last year. Though Schlumberger beat analyst estimates of $0.77 per share, its earnings per share fell to $0.78 in the third quarter—nearly half what it earned over the same period last year.
Even as earnings waned, the company rewarded its shareholders with a $0.50 quarterly dividend.
The anticipation of subdued earnings was not fully priced in, which led to Schlumberg’s stock slipping more than 2 percent in trade on Oct. 16.
Oil prices declined from over $110 a barrel in June 2014 to less than $50 a barrel at the end of September 2015. This forced oil companies to slash their budgets and Schlumberger resorted to concessional pricing to attract their business.
“Almost 40 percent of the revenue decline was attributable to pricing,” said Schlumberger’s Chief Financial Officer Simon Ayat, in the earnings call on October 16.
All three business segments — drilling, reservoir characterization and production — witnessed a drop in activity and revenue generation. The biggest decline came from operations in North America where revenues slid 48 percent year on year. International revenues too, took a substantial hit.
Despite lower revenues, operating margins declined marginally in the third quarter to 18 percent. Flat operating margins have been achieved by cutting costs and internal restructuring. The company has cut 20,000 jobs and paid $750 million in severance since the start of 2015. And layoffs are going to continue.
“The likely timing gap between the oil price recovery and the subsequent increase in oilfield services activity in combination with a more conservative spending outlook from our customers is causing us to now take further action,” said Schlumberger Chairman & CEO Paal Kibsgaard. “We have therefore decided to proceed with a further round of capacity and overhead reductions, which will result in a restructuring charge in the fourth quarter”
Interestingly, squeezing costs and maintaining margins has resulted in a $1.7 billion in free cash flow, a conversion of 170% of earnings for the company in the third quarter alone. Armed with this chest of liquidity, Schlumberger is betting big on M&As. It acquired equipment maker Cameron, earlier this year in a deal valued at $14.8 billion. It took over specialty technology companies like Novatek Inc., Novatek IP, LLC and T&T Engineering Services, Inc that will integrate new technologies and diversify the bundle of services it can offer its customers.
The company also spent over half a billion dollars in the third quarter to purchase its own shares as a part of a $10 billion buyback program initiated in 2013.
But a comfortable cash position and inorganic expansion does not guarantee any change in the company’s fortunes over the short term. The lag between a recovery in oil prices and clients resuming activity has considerably dampened Kibsgaard outlook for the industry and future projections for his company’s financials. In his statement after the second quarter results, Kibsgaard had expected the slump to bottom out in the third quarter but he now admits that recovery is still a long way off and that Schlumberger’s earnings could drop more in the first quarter of 2016 as compared to the last quarter of this year.
Most of Schlumberger’s peers such as National Oilwell Varco and Halliburton Company, though much smaller in size, are also struggling. Schlumberger’s strength lies in its ability to generate cash flows and its aggressive acquisition strategy. Data available on the Nasdaq website reveals that 18 analysts have a “Strong Buy” recommendation on the stock.
