Any investor who wants a master class on what's going on in the global oil market needs to listen to Schlumberger's (SLB 0.26%) conference calls. Not only does Schlumberger have the global footprint that gives it deep knowledge of the market, but its management team is more than willing to share its thoughts. Many of this quarter's themes were similar to the prior quarter's call, but there were a couple of key points to add to the story.
Here are a few snippets from Schlumberger's most recent conference call that are shaping how its management team views the market today and how it should help mold investors' perception of investing in oil and gas in the future.
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First signs of real promise
One of the more important metrics for oil services companies, especially those that operate under long-term contracts like Schlumberger, is the book-to-bill ratio. This ratio is a quick and dirty way to understand how much new business is coming in compared to current activity levels. Ideally, investors want to see a book to bill of 1.0 or better at least, as that is a sign the company is maintaining its current activity levels and growing this business.
In this regard, the first quarter brought some surprisingly good news. According to CFO Siman Ayat, this was the first quarter where Schlumberger's book-to-bill ratio for its long-cycle businesses was greater than 1.0 -- it was just 1.1, but still. This was the first time since Q4 of 2013 that Schlumberger posted a better than 1.0 book-to-bill ratio.
Let's keep this in perspective, though. Revenue for the company has declined more than 50% since the top of the previous cycle, so the hurdle to post that book-to-bill feat has fallen for almost four years. While investors can cheer that these businesses are back on the upswing, it will take several quarters of higher than 1.0 book-to-bill ratios to get back to pre-crash levels.
Some markets are responding slower than others
What is even more interesting about that little data point above is that Schlumberger is still experiencing some declines in its major markets. Several international markets -- where more than 70% of Schlumberger's revenue derives -- have yet to pick back up again. That, according to CEO Paal Kibsgaard, could lead to a supply shortage in the coming years:
At present, the region in the world showing clear signs of increased E&P investments in 2017 is North America land, although investment levels in the Middle East and Russia are also expected to remain resilient this year. However, for the rest of the world, which still make up more than 50 million barrels per day of oil production, we are heading toward a third year of significant underinvestment, which increases the likelihood of a medium-term supply deficit as produced reserves are not replaced in sufficient volume.
In particular, the market continues to focus on headline decline numbers that suggest that production is holding up well, while a closer examination of the underlying data clearly shows that the rate of depletion of proven developed reserves is rapidly accelerating in several key non-OPEC countries.
Schlumberger's improved book-to-bill ratio combined with the less-than-healthy investment levels in the industry today suggest that Schlumberger is capturing a significant share of the limited amount of work going on today. The company was recently contracted to supply the subsea production system for BP's Mad Dog 2 development program, which was one of the larger contracts awarded in the first quarter of the year.
Addressing the weakest portion of the portfolio
The weakest link in Schlumberger's geographic footprint is its North American onshore market. Its largest competitor -- Halliburton -- has a dominant market share, and its current asset portfolio doesn't generate the high rates of return that some of its offshore and international services can get. To improve returns for this particular part of the business, Kibsgaard explained some of the company's thinking behind why it decided to join forces with Weatherford International (NYSE: WFT) to establish the OneStim joint venture:
Building on this broad technology platform, the pending OneStim JV with Weatherford will give us the required scale in terms of both hydraulic horsepower and multistage completions technologies to drive efficiency and market penetration in all the unconventional basins in North America land. At this stage, the regulatory filings have been completed, and as we await the required approvals to close the OneStim transaction, the integration teams are making all the necessary preparations for a successful day 1 of the new company.
Getting into the head of OPEC
To understand the dynamics of the global oil market, investors need to keep track of the investment levels of international oil companies (IOCs), especially those in the Middle East, because of their incredibly large production portfolios. This is one of the most valuable aspects of Schlumberger's conference calls because the company has deep ties as a primary service provider to the IOCs. When an analyst asked Kibsgaard what he was seeing from these larger customers, he said many of these groups are still hesitant to commit large spending amounts to new projects:
But in terms of bigger projects, I agree with you, we haven't seen anything yet. So I think the main thing here is, I think, for the IOC customers to basically get a better medium-term view on oil prices. And obviously, the positive uptick we've seen over the past couple of quarters is a [ good thing ]. But I would assume that they're o looking for what the floor could be and maybe awaiting potentially what OPEC is going to do as we go into the May -- the late May meeting around whether they extend the production cuts or not. So I agree with you. I think the increase in offshore activity or shallow water activity is probably more going to be a second half of the year event, leading into 2018. So with that, though, it's still very important for us as a company to at least secure the work that is coming out of projects that are being FID-ed {Final Investment Decision]. And that's why we are very happy and excited at the fact that we landed the Mad Dog 2 project, for instance.
Over the next few months, we should expect some pivotal decisions about whether OPEC wants to maintain its lower production levels as well as some major FIDs. According to Schlumberger, we should see a considerable uptick in spending in the second half of 2017, but that will be very much predicated on the short- to medium-term outlook for oil prices. If new, quick-to-market sources such as shale continue to increase production and keep prices low, larger project spending could be delayed even further and set us up for an even more drastic medium-term supply shortage.
