Photo credit: Flickr user Nestor Galina.
Schlumberger Limited (SLB 0.67%) recently reported fairly decent fourth-quarter results. Tumbling oil prices caused profit to plunge 82%, but the oil-field services company still beat Wall Street's expectations. While Schlumberger is bracing for the rough oil market to persist in 2015, it's not stressing all that much -- as evidenced by the recent 25% boost to its dividend. This confidence was also quite obvious on the company's quarterly conference call, as management offered five key takeaways for investors that demonstrated its confidence in the company's ability to survive the current storm in the oil market and to thrive once the situation improves.
Not too worried about the oil market
CEO Paal Kibsgaard spent some time on the call discussing the oil market's current issue with supply and demand. His view is that the market is not as oversupplied as people might think. Instead, he argued the issue is that the oil industry is running at full capacity at the moment so that the marketed supply is higher than demand.
Typically, OPEC steps in during these situations to reduce marketed supply. Instead, according to Kibsgaard, OPEC this time "shifted focus from protecting oil prices to protecting market share." That means it's up to the rest of the industry to reduce supply, which takes more time. However, he said the industry is "currently in the process of significantly reducing E&P investments which will lead to a reduction in supply as declining rates impact current production capacity and lower exploration and development activity delay supply additions."
With oil companies cutting investments so rapidly, Kibsgaard said supplies should tighten over the next year. He sees the current glut eventually being worked out of the market and normalcy returning.
Being proactive, not reactive
That said, Schlumberger does not plan to sit back and wait for a recovery. The company recently cut its head count by 9,000 to "bring our head count more in line with the currently anticipated activity levels," according to CFO Simon Ayat. This resulted in Schlumberger taking a $296 million charge in the fourth quarter for severance costs, but the company deemed this action as necessary to "meet the challenges of the current market conditions" as Ayat put it. The company is demonstrating that it wants to stay strong during the downturn so that it can take advantage of future opportunities instead of being forced to react later should things turn worse than expected.
Very strong financially
Ayat also noted that the company boosted its dividend for the fifth straight year, which resulted in its payout doubling over the five-year period. The strength of the company's underlying business and balance sheet made the move possible. Ayat noted that:
This new level of dividend reflects our confidence and our ability to continue to generate superior cash flows and return excess cash to our shareholders even in the face of market challenges. As it relates to 2015, our strong balance sheet ... will also allow us to be opportunistic in terms of taking advantage of market conditions to make strategic acquisitions and investment.
The CFO said the company's balance sheet strength enables it to be opportunistic should opportunities arise during the current market turmoil. Incidentally, the company just that a few days after the call acquired a 45.65% stake in Russia's largest drilling company, Eurasia Drilling. It spent $1.7 billion for the stake and has the option to buy the rest of the company in three years. It snapped up Eurasia at a 60% discount to its previous high as Western sanctions and falling oil prices have decimated the company's market value.
New energy tech is key to improving returns for oil companies
Management also sees the downturn in the oil market leading to more rapid adoption of new energy technology. Kibsgaard noted on the call that "we did see in 2014 a growing uptake and a growing appetite to apply new technologies to drive both higher production and improved cost-per-barrel." This is partially due to a new sales approach in which Schlumberger is going straight to C-Suite executives of its clients to lay out what new technologies do and then give them introductory offers to demonstrate the new equipment. This is leading to much faster adoption as oil companies can see the benefits of the new technology firsthand.
It loves that Halliburton is buying Baker Hughes
Schlumberger was also clear that it is not threatened by the coming merger of its two leading its rivals, Halliburton Company (HAL) and Baker Hughes Incorporated (BHI). Instead, it sees that deal as an "opportunity with a capital O," according to Kibsgaard. The company thinks the deal, as well as the dour oil market, will distract Halliburton and Baker Hughes, enabling Schlumberger to gain market share.
Furthermore, Schlumberger has always felt its market share was limited internationally by what Kibbsgaard called a "glass ceiling," which "has been put in place by our customers to make sure that there is enough work to make a third player viable." With that third player soon to be eliminated from the market, Schlumberger believes it has an opportunity to smash through the ceiling to take share from its rivals.
Investor takeaway
While the oil market is clearly in turmoil, Schlumberger is not fretting one bit. Instead, it sees its strong operations and balance sheet providing an opportunity to take advantage of the situation. It says opportunities are arising from quicker adoption of new technologies, as well as from possible market share gains as a result of the pending merger of its two closest rivals. That's why its management team sounded rather excited about what the long-term future holds for the company.
