Schlumberger Announces Second-Quarter 2016 Results

Schlumberger Limited (NYSE:SLB) today reported results for the second quarter of 2016.

Schlumberger Chairman and CEO Paal 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. As we continued to navigate this challenging environment, we again delivered robust pretax operating income, operating margin, and free cash flow. This performance came as a result of our strong execution and, in some cases, at the expense of revenue as we began shifting focus onto recovering our pricing concessions and high-grading our contract portfolio.

“Our second-quarter revenue increased 10% sequentially, reflecting a full quarter of activity from the acquired Cameron businesses that contributed $1.5 billion in revenue. On a pro forma basis, revenue decreased 12% sequentially with North America falling 20% due to the Canadian spring break-up and a 25% drop in the US land rig count, while international revenue decreased 9% due to weaker activity, continued pricing pressure, and a large-scale cutback in our operations in Venezuela. However, our wide geographical footprint and broad technology portfolio continued to offer unique advantages that helped to mitigate these effects.

“Among the business segments, second-quarter revenues from the Reservoir Characterization and Production Groups declined sequentially by 9% and 11%, respectively, on continued lower demand for exploration- and development-related products and services as E&P budgets were further reduced. Drilling Group revenue fell by 18%, impacted by the steep drop in rig count, particularly in North and Latin America. Cameron Group revenue decreased 6% sequentially on a pro forma basis due to declining project backlog and a further slowdown in activity in US land that impacted the short-cycle businesses.

“Pretax operating margin was maintained above 10% after a sequential drop of 340 basis points due to lower activity, pricing headwinds, an unfavorable activity mix and the significant reduction of our operations in Venezuela. Decremental operating margin on a sequential pro forma basis was limited to 38% as a result of solid cost and resource management while we continued to maintain our long-term capability. The margin decrease has been highest in the Drilling Group, where margin contracted by 649 bps to 8%. Sequentially, Production Group pretax operating margin fell 459 bps to 4%, Reservoir Characterization Group decreased 228 bps to 17%, and the Cameron Group posted a margin of 16%. Diluted earnings per share of $0.23, excluding charges and credits, was 43% lower sequentially.

“As a result of the weakness in activity that will persist through 2016 as expected, we have made another significant adjustment to our cost and resource base, including the release of more than 16,000 employees during the first half of 2016 and a further streamlining of our overhead, infrastructure, and asset base. This has led to $646 million in restructuring charges in the second quarter for the reduction in our workforce, as well as a non-cash $1.9 billion impairment charge for fixed assets, inventory, and multiclient seismic data. We also recognized $335 million in merger and integration charges relating to the Cameron acquisition.

“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.

“As we have navigated this downturn, we have made a series of moves that position us well for the inevitable market recovery. Our balance sheet remains strong in spite of the investments we have made in our business and the cash that we have returned to our shareholders. We have expanded our technology portfolio, not only by the major acquisition of Cameron International, but also by a series of smaller acquisitions that are enabling the development of new integrated drilling and production technologies that will further lower cost per barrel. And we have leveraged the opportunities of transformation to create significant competitive advantage and steadily improve our intrinsic performance.

“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.”

Other Events

During the quarter, Schlumberger repurchased 0.4 million shares of its common stock at an average price of $72.77 per share for a total purchase price of $31 million.

On April 1, 2016, Schlumberger completed its merger with Cameron International Corporation (Cameron). The transaction combines two complementary technology portfolios in a pore-to-pipeline products and services offering. The merger creates technology-driven growth by integrating Schlumberger reservoir and well expertise with Cameron wellhead and surface equipment, flow control, and processing technology. This combination will result in the industry’s first complete drilling and production systems, which will be enabled by Schlumberger expertise in instrumentation, data processing, control software, and system integration.

On June 1, 2016, Schlumberger announced the acquisition of Saltel Industries, an engineering, manufacturing and service company that offers expandable patches and steel packers to the oil and gas industry. These technologies will be integrated into products and services within the Production Group.

On June 2, 2016, Schlumberger announced the acquisition of Omron Oilfield and Marine, Inc. (Omron Oilfield). Omron Oilfield designs, manufactures, sells, and provides aftermarket services for automated drive and control systems, power houses, and drillers’ cabins. The Company expects that this acquisition will accelerate a number of Schlumberger well construction and production projects, including future land rig designs.

On June 23, 2016, Schlumberger closed the acquisition of coiled tubing drilling and coiled tubing units from Xtreme Drilling and Coil Services Corp. (Xtreme). Xtreme operates coiled tubing drilling units in Saudi Arabia.

On July 20, 2016, the Company’s Board of Directors approved a quarterly cash dividend of $0.50 per share of outstanding common stock, payable on October 14, 2016 to stockholders of record on September 7, 2016.

Geographic Revenue

Second-quarter revenue of $7.2 billion increased 10% sequentially with North America and International revenue increasing 19% and 8%, respectively. This included a full quarter of activity from the acquired Cameron businesses, which contributed revenue of $0.6 billion in North America and $1.0 billion internationally.

North America

North America pro forma revenue decreased 20% sequentially as a result of the Canadian spring break-up and the US land rig count decline of 25%. Land revenue fell 22% on lower activity in the Drilling and Cameron Groups, combined with continuing pricing pressure in the Production Group. While fracturing stage counts and active pressure pumping fleets increased more than 15% sequentially, an unfavorable job and technology mix, combined with pricing pressure, more than offset the increase in volume. North America offshore revenue decreased 17%, mainly due to lower Drilling Group activity, although this was partially offset by higher WesternGeco multiclient seismic license fees.

International Areas

International pro forma revenue declined 9% sequentially due to customer budget cuts, continued pricing pressure, activity disruptions, and the scaling back of operations in Venezuela.

Pro forma revenue in the Latin America Area declined 26% sequentially, mainly due to scaling back of operations in Venezuela. Activity in the rest of the Area continued to decline, particularly in the Mexico & Central America and Brazil Geomarkets, as land and offshore rig counts fell due to customer budgetary constraints. In addition, integrated project work decreased in Mexico as campaigns ended and rigs were demobilized. The Drilling Group saw the largest drop in the Area, while the decline in Production Group revenue was partially offset by robust Schlumberger Production Management (SPM) operations.

Europe/CIS/Africa Area pro forma revenue decreased 7% sequentially, mainly in the Nigeria & Gulf of Guinea, Central & West Africa, and Angola GeoMarkets where rig counts declined and projects ended. Norway & Denmark GeoMarket revenue declined due to seasonal maintenance shutdowns. Russia and Central Asia revenue increased, however, as activity recovered after the winter slowdown and the Russian ruble strengthened.

Middle East & Asia Area pro forma revenue declined 2% sequentially. This was mainly due to lower activity in the Asia Pacific region and Australia & Papua New Guinea GeoMarket and as a result of customer budget cuts and project completions, with the Drilling Group most affected by this decline. However, revenue from the China GeoMarket increased on higher Cameron Group activity. Revenue from the Middle Eastern GeoMarkets was essentially flat as increased activity for the Production and Reservoir Characterization Groups was offset by pricing concessions.

Reservoir Characterization Group revenue was $1.6 billion, with 80% coming from international operations. Revenue was 9% lower sequentially, primarily due to the scaling back of operations in Venezuela and project cancellations that impacted Wireline activity internationally. Testing Services revenue and Software Integrated Solutions (SIS) software sales also declined, particularly in Latin America. These declines were partially offset by higher multiclient seismic license sales in the US Gulf of Mexico and transfer fees in the Brazil GeoMarket and the Europe/CIS/Africa Area.

Pretax operating margin of 17% declined 228 basis points (bps) sequentially due to reduced high-margin Wireline and Testing Services activities, particularly in Latin America. These effects, however, were partially offset by improved profitability in WesternGeco on stronger multiclient seismic license sales and transfer fees, although decremental margin remained elevated as the Group maintained longer-term capability and petrotechnical expertise.

Reservoir Characterization Group performance was boosted by a number of integrated services benefits, technology deployments, transformation initiatives, and new contract awards during the quarter.

Offshore Norway, Integrated Services Management (ISM) used a combination of drilling and completions technologies for OMV Norge to drill a horizontal appraisal well in the Barents Sea. Drilling & Measurements GeoSphere* reservoir mapping-while-drilling technology enabled optimum well placement in the reservoir by using deep directional electromagnetic measurements. Drilling efficiency was enhanced using Stinger* conical diamond element and PowerDrive Xceed* ruggedized rotary steerable system while Geoservices Drilling Analyst* services enabled the integration of surface and downhole measurements to optimize the drilling process, mitigate risk, and reduce nonproductive time. M-I SWACO STARGLIDE* lubricant provided enhanced friction reduction while the ENVIROUNIT* offshore slop water treatment system ensured adherence to environmental regulations. In addition, Testing Services OrientXact* tubing-conveyed oriented perforating system minimized perforation damage by providing stability during drawdown and depletion. As a result, the customer benefitted from a 461-m section of the well that delivered high flow rates under minimal drawdown.

Offshore Canada, Schlumberger completed the first phase of an ISM contract for Statoil in the deepwater environment of the Flemish Pass basin. The phase included nine exploration and appraisal wells with a total of 24,000 m drilled over 19 months and incurred no health, safety, or environmental incidents during the 12,000 operational hours. The integration and coordination of a range of Schlumberger technologies improved drilling efficiency, assured wellbore integrity, optimized well placement, and played a significant role in the two discoveries Statoil made during this campaign. One well established a net rate of penetration record of 190.1 m/h while another well that was drilled in a water depth of 2,829 m was the deepest for offshore Canada and Statoil globally. The customer benefitted from ISM by completing the project by the appointed target date, despite weather-related challenges, and included several of the 33 hole sections among their top drilling performances worldwide.

In the United Arab Emirates, Testing Services deployed Muzic* wireless telemetry for Al Hosn Gas during appraisal testing operations in an undeveloped field. Five downhole tests were performed to evaluate gas wells with a high H2S content. The flexible design of Quartet* downhole reservoir testing system technology eliminated the need for multiple runs while wireless transmission and monitoring of downhole pressure facilitated real-time transient analysis to optimize decision-making and provide critical information to determine reservoir properties. In addition, information from Signature* quartz gauges helped assess well performance during stimulation operations and supported downhole and surface sampling decisions.

In the US Gulf of Mexico, Wireline introduced MaxPull30* high-pull wireline conveyance system to complete five descents of logging tools under maximum continuous tension of 20,900 lb in a deepwater well. During one descent, MaxPull30 technology withstood 29,300 lb of tension to free the tools from the borehole wall, which avoided a four-day fishing job that would have cost the customer $3.1 million in rig time. The maximum continuous pull and the single instantaneous pull to free the tools stand as the highest tensions recorded. In the same well, XL-Rock* large-volume rotary sidewall coring service successfully retrieved 91 of the 109 cores attempted.

In China, Wireline Flow Scanner* well production logging technology was used for Technical Service Company of JHOSC Sinopec in the Fuling shale gas project to evaluate multistage hydraulic fracturing operations in a challenging wellbore environment. Conveyance challenges were overcome using Well Services ACTive PS* CT real-time production logging service technology that combines real-time fiber-optic telemetry with advanced wireline production logging tools to deliver greater operational efficiency, enhanced production, and a decreased environmental impact. The customer benefited from accurate data to identify low rates of gas production in a 30-well campaign.

The Schlumberger transformation program enabled WesternGeco to increase its global marine operational reliability through improvements in operations integrity. Since 2013 the nonproductive time rate has decreased 62% through the optimization of job design, planning, and execution. A key contributor to this result was a 68% improvement in marine source reliability during the same period by implementing reliability centered maintenance (RCM) and procedural adherence to standard work instructions (SWI). Through the development of SWI and deployment of the Competency Management System, WesternGeco is targeting improved utilization of its vessel fleet.

In North America, EP Energy Corp awarded SIS the first INTERSECT* high-resolution reservoir simulator in the Cloud contract. The contract is a part of EP Energy’s Model to Design workflow that digitizes the completion process to optimize operations. In addition, EP Energy invested in four additional licenses for Mangrove* engineered stimulation design in the Petrel* E&P software platform.

In the UK, Total E&P UK awarded WesternGeco a contract for a 4D survey in the North Sea Elgin-Franklin field using IsoMetrix* marine isometric seismic technology. The complex 250-km2 project, which is the world’s first commercial IsoMetrix 4D monitor survey, requires simultaneous operations with a second vessel undershooting obstructions to ensure superior imaging in the highly congested field. The survey will monitor changes in the reservoir since the previous WesternGeco survey in 2012.

Drilling Group revenue of $2.0 billion, of which 81% came from the international markets, declined 18% sequentially. This was mainly the result of a sharp drop in drilling activity from a combination of the spring break-up in Canada, lower rig counts on land in the US and Latin America, and the scaling back of operations in Venezuela. In addition, continued and persistent pricing pressure negatively impacted Drilling & Measurements and M-I SWACO results across all of the Areas.

Pretax operating margin of 8% contracted 649 bps sequentially, leading to higher decrementals as revenue declined on pricing weakness. This effect was exacerbated by lower rig counts in North America and the scaling back of highly accretive operations in Venezuela.

A combination of contract awards, transformation program gains, integrated services benefits, and new technology deployments contributed to Drilling Group performance in the second quarter.

In Norway, Centrica E&P Norway awarded Schlumberger a four-year integrated drilling services framework agreement for all Centrica-operated drilling activities on the Norwegian Continental Shelf. Combining all services into one contract, the framework is based on the operator and service provider’s intent to work together more closely. The contract model, which is largely performance based, includes strong incentives to optimize drilling efficiency and is a win-win for Centrica, its partners, and Schlumberger.

Offshore Brazil, Schlumberger deployed Stinger* conical diamond element technology on a Smith customized drill bit for Petrobras to drill the 12 ¼-in interval in a pre-salt well in the Lula field. Stinger technology achieved an average rate of penetration (ROP) of 4.37 m/h—exceeding the best average on an offset well by 22%, saving 22 hours—and drilled the 441-m section in a single run, 42% faster than average to save an additional 41 hours. This performance helped Petrobras set a new performance benchmark in cost per meter for 12¼-in well sections in the Lula field.

In US land, Bits & Drilling Tools used ONYX 360* rolling polycrystalline diamond compact (PDC) cutter technology to set a new record for Unit Petroleum in the Granite Wash unconventional formation. ONYX 360 technology increased drillbit durability and footage drilled as the entire diamond edge was used to drill the formations while it rotated 360°. This enabled the customer to drill the longest and fastest lateral wellbore in the formation by exceeding the previous record by 62% in lateral length and 27% in rate of penetration.

In Ecuador, Schlumberger used a combination of drilling and completions technologies to drill two wells for ENAP-SIPEC in the Inchi field. Drilling & Measurements PowerDrive* rotary steerable systems and StingBlade* conical diamond element bit technology provided drilling efficiency with remote support from experts working in the Drilling Technology Integration Center. Completions automatic release gun anchor (MAXR) combined with Wireline PowerJet* deep penetrating shaped charges and the PURE* clean perforations system maximized penetration and reduced reservoir damage. As a result, the customer achieved a 278% increase in the wells’ combined production. Also, one well was drilled one-and-half days ahead and the second well four days ahead of the original plan, reducing drilling costs by approximately $1.5 million.

In Russia, Bits & Drilling Tools introduced AxeBlade* ridged diamond element bit technology for GazpromNeft to drill wells in the Tsarichanskoye and Filatovskoye oil and gas condensate fields of the Orenburg region. AxeBlade bit technology features a ridge-shaped geometry that combines the shearing action of a conventional PDC cutter with the crushing action of a tungsten carbide insert cutter. In one well section, AxeBlade technology increased the rate of penetration by 45% compared to the best offset well drilled with a conventional PDC drill bit. In addition, the customer saved rig time by completing the section in three runs rather than the usual five.

In China, Drilling & Measurements used PowerDrive Orbit* rotary steerable system for CNOOC to overcome challenging drilling conditions and save rig time in a 12 1/4-in well section in the Huangyan basin. PowerDrive Orbit technology drilled 2,498 m in a single run, which now stands as a record for the longest single run meterage for this technology in a 12 1/4-in well section, and also established a benchmark for the region. As a result, the customer avoided one additional run, saving $140,000 and 28 hours of rig time.

Offshore Azerbaijan, Bits & Drilling Tools used a combination of technology for BP Azerbaijan to overcome drilling challenges in the Chirag field in the Caspian Sea. The Rhino XS* hydraulically expandable reamer and the M-I SWACO WELL COMMANDER circulating tool enabled complex mud conditioning and wellbore cleanout operations. Rhino XS reamer has a single-piece body that allows for higher tensile and torque-load capacity, while WELL COMMANDER tools enable operators to boost circulation to remove cuttings at strategic points in the drillstring. As a result, the customer saved 48 hours of rig time on an offshore platform.

In Gabon, Drilling & Measurements used PowerDrive Archer* high build rate rotary steerable system for Shell to drill three wells in the Rabi field. These medium, short radius wells were drilled in a single run from the whipstock window to the end of the horizontal drain. The customer benefitted from decreased costs as each sidetracked well was delivered two to six days earlier than planned. In addition, the repositioning of the drains in the reservoir enabled a 20% production increase.

In Russia, the Schlumberger transformation program enabled increases in people productivity through remote operations. Drilling & Measurements implemented an automated notification system that helps identify jobs for remote operations and more efficiently manages crew size via a drilling portal. Since implementing the system, the use of remote operations increased from approximately 50% of jobs in the second quarter of 2015 to 75% of jobs in the first quarter of 2016. In addition, on-site crew size decreased by 6% in 2015 compared to 2014, which reduced exposure to safety and environmental risks while maintaining a high level of service quality.

In Norway, Det norske oljeselskap ASA (Det norske) awarded M-I SWACO a four-year contract to supply specialty chemicals and associated services for the Alvheim and new Ivar Aasen offshore developments. Technical support will be supplied to all of the company’s offshore operations from the Trondheim shore base and Stavanger remote operations center.

Production Group revenue of $2.1 billion decreased 11% sequentially with more than one-half of the revenue decrease attributable to a decline in North America from the Canadian spring break-up and increased pricing pressure. While pressure pumping fracturing stage counts and active fleets increased more than 15% sequentially, an unfavorable revenue mix combined with pricing pressure more than offset the increase in activity volume. North America’s contribution to the Group’s revenue this quarter declined to 25%.

Pretax operating margin of 4% decreased 459 bps sequentially, mainly from lower activity and increasing pricing weakness in pressure pumping services on land in North America. Sequential decremental operating margin expanded as a result of the decision to maintain operational capability in certain locations to defend market share despite lower activity. Robust Schlumberger Production Management projects, from which co-managed production worldwide has now reached around 250,000 bbl/d, continued to contribute to accretive margins for the Group.

Production Group results benefitted from a number of new technology deployments and transformation program initiatives during the quarter.

In Kuwait, Well Services used the HiWAY* flow-channel fracturing technique in six wells in a sandstone reservoir with high shale and silt content in the southeastern part of the country. HiWAY technology increased conductivity while also reducing water and proppant consumption, which translated to a smaller operational footprint as well as simpler logistics. Although the six wells had been treated with conventional stimulation systems that did not induce production after treatment, HiWAY technology helped the customer achieve production flow rates that are three times higher than initial expectations.

In Oman, Completions deployed the first behind-the-casing fiber optic distributed temperature sensing (DTS) technology for PDO in the Marmul field. Currently under enhanced oil recovery using a polymer flood process, the Marmul field benefitted from the combination of DTS and distributed acoustic sensing technology, which provide in-depth measurements used in the analysis of injection and production profiles for polymer flood conformance.

Offshore Brazil, Well Services used CoilFLATE* coiled tubing through-tubing inflatable packer technology for Petrobras during a plug and abandon campaign in the Campos basin. CoilFLATE technology is designed to keep the packer in place, providing a reliable high-pressure seal at large inflation ratios, which can withstand any chemical environment and temperatures up to 375 degF. In addition, ACTive DTS* distributed temperature measurement enabled real-time downhole data acquisition that detected a leak and subsequently avoided three rig days of unnecessary remedial work in order to successfully complete the operation.

In Brazil, Well Services used Invizion RT* real-time well integrity service in a well for Repsol Sinopec Brasil in the ultra-deepwater Campos basin. Invizion RT technology improved cementing operations in the intermediate well section by enabling monitoring, control, and evaluation of cement placement in real time. The ability to eliminate a top-of-liner squeeze job and confirm the top of isolation saved the customer more than 12 hours of rig time.

Offshore Angola, Well Services used a combination of technologies for Total Exploration & Production on the Kaombo project. Deepwater wells present challenges to isolate intermediate water-bearing and hydrocarbon- bearing zones with narrow pore pressure differentials and fracture gradients. Losseal Microfracture* lost circulation technology combined with the MUDPUSH* spacer family provided optimal mud removal and saved rig time during cementing operations.

In US land, Well Services used LiteCRETE* lightweight cement slurry to isolate a customer’s newly designed production casing with cement to surface in a Lea County, New Mexico well. LiteCRETE technology has exceptional compressive strength and permeability when set and provides excellent perforation quality without reducing cement integrity. By eliminating one casing string of what i

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