Schlumberger Limited

Photo credit: Flickr user Nestor Galina

Schlumberger Limited (NYSE:SLB) recently reported second-quarter results that were less awful than expected. In fact, the case could be made that the company is really doing an exceptional job managing the downturn. That's certainly the case the company's management team made on its second-quarter conference call. In fact, CEO Paal Kibsgaard emphasized this at the very end of that call by summarizing the three key points the company wanted to drive home to investors. Here are the "three most important points" that the company's CEO wants investors to know.

1. We're having our best downturn ever
Kibsgaard began his closing remarks by saying,

[...] The market evolution in the second quarter was the continuation of what we saw in the first quarter with North America land rig count falling further and with pricing pressure increasing in both North America and International markets. In response to this, we have proactively managed what remains under our control and subsequently delivered our best cost and cash performance so far in any downturn.

Kibsgaard notes that market conditions deteriorated further in the second quarter as the U.S. land rig count dropped. He had noted earlier in the call that the drop was 40% over just the prior quarter; however, despite that plunge Schlumberger's revenue in North America only fell 27% sequentially. Not only did revenue hold up much better than expected, but margins weren't squeezed as much as in prior downturns. He pointed this out by comparing this downturn's rig count drop to the last by saying the recent drop 

[...] exceed[ed] those of the 2009 downturn in both pace and size. Still, we have delivered first half decremental margins of 37% in North America and just 18% in the International Area. These decremental margins represent a marked improvement over equivalent figures from the last downturn, which were in excess of 70%, particularly as we begin to approach what we believe is the market bottom.

What he is suggesting is that while this downturn is much deeper and happened faster than the one in 2009, Schlumberger's margins have held up much better, falling only 37% compared to more than 70% last time. This is because the company has proactively managed what it can control, namely its costs, and is therefore now coming out ahead.

2. Our transformation program is working
The second thing Kibsgaard wanted investors to know was that,

[...] Our strong performance has been amplified by the acceleration of our transformation program, which is being actively implemented throughout our global organization and which has enabled us to increase pre-tax operating margins in the International Areas and maintain double-digit margins in North America.

Earlier in the call Kibsgaard reminded investors that it was one year ago that the company unveiled its transformation program, which he said was, "designed to provide a new approach to how we run our business in order to enable fundamentally better performance." It's a program that is designed to deliver better cost management, better product quality, and better service deliverability, meant to drive strong free cash flow generation for Schlumberger. It's a program that is working, as evidenced by the fact that margins didn't fall off a cliff last quarter, while the company also generated strong free cash flow totaling $4.1 billion so far this year, despite having to spend an extra half billion dollars on severance costs.

3. We see the bottom
The final point Kibsgaard wanted to hammer home was that he believes that the worst is over. He said that,

[...] We believe that we now have seen the bottom of the rig count decline in North America and that North America land activity will see a slow increase in the second half of this year while service pricing is expected to decline further in the third quarter as the fight for market share continues to play out...Based on this, the third quarter could potentially represent the bottom of the cycle in terms of earnings per share as the pace of the revenue drop is set to slow and as we continue our steadfast efforts to maximize operating margins in both North America and international markets.

From what Schlumberger is seeing from the market and its customers, Kibsgaard is growing more confident that we've now seen a bottoming out of oil and gas activity. As such, the third quarter will still be weaker than this quarter due to some follow through as the market bottoms out. However, he noted earlier in the call that he only sees revenue dropping "something in the range of 5%, 6%" sequentially, while earnings "of $0.77 [per share] is a pretty realistic number." That's welcome news as it suggests that the company's results could really accelerate as we head into 2016.

Investor takeaway
While the oil market is in the midst of one of its worst downturns in years, Schlumberger is very excited about the future. It managed this downturn better than previous downturns as it kept its cost in check while its transformation program really begins to bear fruit. Even better, the company now sees a bottom in the market and predicts an uptick in activity and its financial results starting as early as the fourth-quarter, suggesting much better days lie ahead.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.