Despite posting better-than-expected results in the third quarter, investors seem to be more worried about some of the things Schlumberger's (NYSE:SLB) CEO Pal Kibsgaard had to say about the oil market. As one of the largest oil services companies out there with a huge international presence, it's worth listening when the company talks about what it's seeing. Here are five quotes from Mr. Kibsgaard that can give investors a better feel for what to expect from the oil and gas market in the coming quarters.
Recovery is still a ways off
For investors, watching for improving oil prices lately seems like waiting for Godot. So it's not surprising that Kibsgaard seems to be playing the role of Godot's messenger boy when he gave the company's outlook for the industry:
We expect E&P investments to fall for a second successive year in 2016, which is the first time since the 1986 downturn when the spare capacity cushion was more than 10 million barrels per day. In spite of the need for the industry to increase investment levels to mitigate the pending impact on global supply, we instead see an increasing likelihood of a timing gap between the expected improvement in oil prices and the subsequent increase in E&P investments and oil field services activity. This timing gap or increased response time is a direct consequence of the dramatic cuts in E&P investments, which have clearly damaged the oil industry's financial strength and investment appetite as well as the operating capacity and capability... So while our macro view has not changed in terms of a tightening supply and-demand balance and an expected improvement in oil prices, we have to factor in that the likely recovery in our activity levels now seems to be a 2017 event.
Kibsgaard isn't the only one saying this, either. Many of the integrated majors have been making similar statements and have drastically cut their capital expenditure budgets for the coming year.
Picking off the low-hanging fruit
Some people could argue that production rates have remained much more robust than so many predicted once oil prices started to decline. While we have seen many companies improve cost structure and maintain production levels, Kibsgaard thinks that many of these efforts are one-time hits companies can do to give their business a jolt and ultimately delay the inevitable:
I think it's playing out more or less as we have expected globally. I think what you see within OPEC, there is really no change to overall production capacity. There is a continued shift from spare capacity into marketed supply. In North America, the production is coming down more or less as expected as well. And internationally, we are starting to see signs of a weakening supply as well. I think in all these 3 main sources of supply, while production is starting to come down, I think there are also significant efforts to maximize production within each of these basins by, in some cases, taking more short-term actions to maximize production, which might actually have a negative impact on long-term recovery. I think there's only a limited period that this can be done. And while the various players exhaust these type of opportunities, if investments aren't increased, I think you'll see a further acceleration of the drop in production.
Bankruptcy won't be the panacea that so many think
Ever since the oil services space started to generate a decent chunk of revenue from hydraulic fracturing, the market for those services has been plagued by rapid swings between under- and oversupply. Today, the oversupply has put many smaller services companies to the brink. Kibsgaard does not, however, foresee bankruptcies in the oil services sector clearing the glut of equipment as much as some might have hoped:
Yes. I'm not very optimistic on any turnaround in service and product pricing for Oilfield Services in North America land. I think, yes, many of the small companies or most of the small companies are free cash flow negative. They are under significant financial stress, and maybe some of them will go bankrupt in the coming quarters or in the coming year, but there is still massive overcapacity. And even the small companies that go bankrupt will likely be picked up by other investors, and their assets will be returned back into the market. So no, I think the overcapacity is going to be with the industry for quite a considerable amount of time. So I don't expect any real improvement in service and product pricing in the coming year in North America land.
Ambitious plans for its acquisition
Schlumberger is venturing into a new realm with the acquisition of Cameron International (NYSE:CAM). The two companies have worked together on their OneSea joint venture for some time, but this will be the first time Schlumberger will have a significant presence in equipment manufacturing. According to Kibsgaard, it will lead to some considerable cost savings:
But I think, over time, and maybe not already in 2016, there is significant cost reduction potential in the -- for the deepwater, I think, both when it comes to the well cost, as well as for the overall infrastructure. I think we can simplify. We can standardize. We can engineer costs out of the system. And what that will allow, if you can, for instance, reduce the well cost by, say, 30%, you can potentially drill 4 wells for the price of 3, which again will help you increase production and recovery from the deepwater fields, which obviously will help to lower cost per barrel and improve the economics.
Considering the amount of cost savings that companies have started to realize recently across all different types of production, it would not be surprising if they are able to achieve profitability at lower oil prices than pre-crash.
We'll know it when we see it
There has been a lot of discussion about when the market will turn, but there is much less focus on what kind of prices it will take to start the turnaround. When asked if there was a price target he thinks will signal that turn, Kibsgaard suggested that oil companies have been burned so hard that they will likely want to see a sustainable higher price more than an a dollar target:
No, I don't have a specific oil price number in mind. I think it's going to be much more a function of how sustainable our customers see the increases in oil prices to be, and I think it's more about having a stable basis for increasing investments before they go ahead and do it, right? I'm -- I still think that there are -- that there's going be conservatism based on the very tough 4 quarters that the industry has gone through at this stage. And that's why, again, we are basically saying that there is going to be a lag between higher oil prices and investments, and even a lag between higher investments and realizable oilfield activity.
It may take some time before Schlumberger starts to see a rebound in revenues, but thanks to the moves it has made over the past year, it should be able to squeeze out some small profits in the downturn. When the turn does come, though, Schlumberger will be ready.
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