SLB
#Thank you, <UNK>
So next let’s turn to the oil market where a sustained growth and demand continues to provide a much needed foundation for the outlook leaving little reason for concern over this part of the oil market equation
The supply side however is far more complex with market nervousness and investors speculation generally overshadowing facts and physical fundamentals leading to unpredictable movement in oil prices inspite of a third year of global under investment
The status of the global oil supply is best described by splitting the production base into three main block
First, Russia and the OPEC Gulf countries, second U.S
lands and third the rest of the world
The OPEC Gulf countries and Russia which combine make or close to 40% of global oil production remain fully committed to sound and consistent stewardship of their resource base
This is reflected in a steady increase in oil selectivity over the past three years as the world’s best well at economics easily absorbed the significant drop in oil prices
These countries are also actively supporting the rebalancing of the global oil market by taking a procative role in moderating the current production levels
The other two blocks of supply are currently pursuing diametrically post directions to both investments and resource management driven by the respective stakeholders
The production level from the U.S
land E&P companies which currently represent around 8% of global oil supply is largely driven by the U.S
equity investors who are encouraging, enabling and rewarding short term production growth inspite of marginal project economics
The fast barrels from U.S
land are facilitated by a factory approach to both drilling and production and supported by a rapidly scalable supplier industry with a low barrier to entry
In this market the pursuit of equity appreciation outweighs the lack of free cash flow, net income and return on capital employed for both E&P companies and the service industry
And although the fast barrels from U.S
land have already cooled the oil price sentiments as well as the evaluation of the equity investments themselves, this has yet to limit the investment appetite for additional production growth
The last book of producers making up the rest of the world today represents over 50% of global oil production and covers a broad and diverse group of IOCs, NOCs, and independent operators
In aggregate, this group is for the third successive year highly focussed on meeting the cash return expectations of their shareholders whether these are equity investors or governance
The operators meet these requirements by striving to keep production flat by producing their existing outlets part of their normal and by limiting investments to what provides short term contributions to production at the expense of increasing deflection rates
These producers have also benefited from a production tailwind of 500,000 barrels to 700,000 barrels per day in each of the past three years coming from new projects where the majority of the investments were made in previous years
And with a low rate of new projects being sanctioned since 2014 this tailwind will taper off in the coming years
This harvesting approach is not uncommon for conventional oilfields that are in their last years of life prior to being shut in
However, this investment in stewardship model is sustainable for a vast resource space that is both expected and required to provide a substantial part of global oil production for decades to come
Needless to say, the longer the current under investment carries on, the more severe the cliff like decline trend will likely be when the producers run out of short term options to maintain production
And given the size of the production base, it would be difficult for the rest of the global producers to compensate for this pending supply challenge
So, how does this supply and demand situation translate into the current status of the oil market? Following the extension of the OPEC and non-OPEC production cuts agreed in late May, the oil markets and also included, we are expecting to see clear reductions in global inventory levels in the second quarter leading to a more positive sentiments in the oil market
Instead, oil prices and market sentiments became unexpectedly more negative driven largely by fear of oversupply from the growing production from U.S
land where investments and activity is booming
This increasingly negative sentiment is reflected in the oil markets interpretation of the latest industry data points
First the fact that oil to the inventories are coming down so much slower than expected is currently a major concern for the market, although inventories are still coming down and the drills are expected to accelerate in the second half of this year
And second, the fact that production from Libya and Nigeria has increased in recent months it is also a major concern for the market even though these countries were excluded from the production cuts because their production levels were low at the time of the agreement
What we are currently witnessing is that the U.S
equity investors and E&P companies have spooked the oil market investors into believing that the fast barrels from U.S
land will flood the markets and leave inventory levels elevated for the foreseeable future
Therefore their pursuit of short term equity returns from the U.S
land E&P stocks is actually preventing the recovery of the oil market and sending oil prices further down thereby eliminating any equity appreciation that the investments set out to create in the first place
So what does this mean for the outlook for oil prices and E&P investments? The latest developments in the oil markets has created more uncertainty around the shape and timing of the global industry recovery
However, the near to medium term market evolution will continue to be dictated by the following three factors
First, with the moderation and the investment appetite towards the fast but marginal barrels from U.S
land leading to a stronger focus on E&P financial returns and the need to operate within free cash flow
Second, with the key OPEC and non-OPEC countries extends the production cuts beyond the current nine month agreement
And third, with the emerging trend of a gradual investment increase in the rest of the world accelerate, develop mitigate or at least dampen the pending medium-term supply challenges
These three factors are somewhat interdependent and forecasting the forward part from the current market situation is at present difficult given the unpredictable and at times irrational behavior of the broader oil market
Still it remains clear to us that the current underinvestment in the rest of the world with increasing certainty create a mounting supply challenge over the coming years which will require a significant increase and acceleration in global E&P spend
At present we are seeing the first small signs of increasing investments in the rest of the world
However, the further evolution of this emerging trend will still be governed by the actions of the OPEC Gulf countries and Russia on one side and the U.S
equity investors and E&P companies on the other
New fund moderation from the U.S
producers combined with continued moderation from the OPEC Gulf countries and Russia should pave the way for a steady increase in oil prices
This in turn will provide an investment platform that will allow all three supplier groups to increase E&P spend to jointly help mitigate the pending supply issues
On the other hand, an absence of moderation from both sides could lead to further drop in oil prices which in turn would both accelerate and amplify the pending supply issues
In this market we continue to focus on serving our customers and driving on business forward by broadening our technology portfolio and increasing our addressable market by further streamlining our execution machine and by pursuing new and more collaborative ways of working with our customers
And in doing so we are maintaining a balanced coverage of the global oil and gas industry allowing us to effectively address current and future customer activity
This includes U.S
land where we today are seeing strong growth in both activity and service pricing
The OPEC Gulf countries and Russia already continue to see strong activity and a broad uptake of our entire technology offering, as well as the rest of the world which in spite of record low activity levels still represent over 50% of global oil production and we’ll at some stage need to return to considerably higher investment levels even to just uphold current production
As part of our global focus we yesterday announced our intention to acquire a majority stake in the Eurasia drilling company in Russia
This extents the success for long-term relationship we have enjoyed with EDC through this strategic alliance we sign in 2011 which has enabled the deployment of a broad range of our drilling and well engineering services to our customers in Russia land
The pending EDC transaction together with our recent investment in a land rig manufacturing facility in Kaliningrad will further broaden our present infrastructure and capabilities used to serve the conventional Russian land drilling market
In <UNK>ern Siberia, the land drilling contractors continue to have the leading role in providing integrated drilling services through turnkey models
And as the uptake of horizontal drilling continues to increase the deployment of integrated drilling systems through the EDC platform including our rig of the future, will allow us to bring new levels of drilling efficiency to our existing and new customers in this large market
So we are pleased to have reached this agreement with the EDC shareholders and we are already well advanced in preparing the regulatory filings required to complete this transaction
That concludes our prepared remarks
We will now open up for questions
Question-and-Answer Session
Good morning, <UNK>
Well, I think we talked about this before and this – the overall set up of the U.S
shale business where there hasn’t been positive cash flow or positive free cash flow for what the – the last six, seven years
We have comment on that as that’s being a bit of a surprise already
Now whether it will continue or not, I think its going to come down to two things, whether they can still continue to borrow going into 2018 and whether they continue to hedge
So I think today they still operate beyond cash flow, but I think the situation for the rest of the year is relatively set
So we expect to see steady increase in activity both in Q3 and Q4. What will happen in 2018? I think is a bit early to say
But as of now I think its still likely that we will continue to see strong activity in the U.S
in 2018 whether it will have the same type of growth rate we’ve seen in 2017, that might not be the case
From our standpoint, or from the E&P?
Well, it’s difficult for me to say that
I mean you see a range of so call breakeven costs where some of the transportation premiums, the discounts to the WTI standard, the amortization of the infrastructure and land is not included
So, it is very difficult for me to say, but if you go back and look at both cash flow and profitability for most of the E&Ps in Q1 where the situation actually was quite favorable
There was limited pricing faction from the service industry and the commodity price were still high than what it is today
I think they were probably few of them even at that stage that really generated a profit
So, it's difficult for me to say
From our standpoint like we commented on in the prepared remarks, we are now profitable in all product lines
And we see continued growth in activity going forward in the next couple of quarters
So at least our business is back in the back and we are now obviously actively pursuing market share
Thank you, <UNK>
Well, that was absolutely the plan, <UNK>, that’s the plan
Thank you, <UNK>
Good morning
Clearly, we have mentioned some of the deals here in our earlier remarks and clearly today there is an opportunity in North America for this business model because it is also allowing us to bring the appropriate technology into the shale plays that we have won it or into the tight oil and gas and therefore there is a increasing opportunity set also in North America and for that matter I would say that today we have opportunities in just about every geography around the world
Absolutely
Yes
So we ---+ if you are doing the exit on Q2 I would say that Q3 will be pretty much 1.0 as well
We will continue to deploy at almost exactly the same rate and we expect to have all our total fleets of ideal pressure pumping assets in operation by early Q4. Now after that the startup cost will start to abate
It will come down in Q4 and going into Q1. But Q3 will see the same rate of deployments and unfortunate the same rate of startup costs
But we are very pleased with the progress we’re making here and we have ---+ the rate of deployments that we have now in our pressure pumping business is unprecedented, we’ve never gone at this rate before
Okay
Well, if I first look at the overall the international market in terms of the nature of activity
What we ---+ first of all, what we are seeing in most of the basins around the world takeaway as we say Russia and the OPEC Gulf, we are at unprecedented lows in terms of activity
So I think it’s very natural that activity starts to come back
We were somewhat positively surprised at the rate it came back in Q2. It is not a dramatic increase
But it was more than what we were expecting from seasonality
And if you takeaway Cameron which is three, four quarters behind in the cycle compared to the legacy Schlumberger business
We grew the legacy business 10% sequentially in land, 8% in ECA and 2% in MEA
So these were numbers generally higher than what we were anticipating
So it is a combination I would say of land focus in all of the three reporting areas
But as we commented on this well, there are signs now of offshore project being prepared for FIDs and tendering, we see it in particular through OneSubsea business and a lot of this is tiebacks which basically the nature of that is going to be a lot more short cycle on the offshore business than what we’ve seen in the past
And generally on land it is all short cycle as well
So, the lion share of the activity we’re seeing internationally is short cycle, which is what you would expect where the operators are looking to minimize the time between cash outlays and production coming back
We don’t discuss the details of what their ---+ their decision-making is based on
Other than that we are very actively work with all customers in bringing cost to barrel down, whether this is offshore or on land
And given the fact that I would say a lot of the operators have been producing their assets quite hard over the past two, three years
I think there’s a need to start replenishing reserves and also supporting production with more wells and smaller tiebacks and so forth
So, given the fact that this uptick has happened in the second quarter, but actually saw low oil prices than in the first quarter
I think this is more a general direction of the international production base
Most basins have unprecedented low activity and investment levels, and we seem to be coming off the bottom now
It will obviously supported more by higher oil prices, but there has been movement in the second quarter, which has actually seen a more negative oil price sentiment
I think that’s going to turn in the second half of the year in the terms of sentiments, but the start of growth momentum, although still nascent has happened in the second quarter
Thank you
Good morning, Jim
Well, first of all, I’m not saying that that’s happening
So, I think it’s unlikely that you’ll see a major sort of tectonic movement here
But the fact that the industry in North America land continues to operate way beyond cash flow
I think that’s going to be challenged if oil prices stay where it is
So that could mean for sure that the growth rate would slow
I don't think you’ll see a significant reduction in activity, but I think the growth rate might slow
So I think there is still going to be possibilities both to land and potentially raise more equity, but in the event we continue at the current oil prices
I think the industry is going to be a bit more strain than what we have seen in 2017. Now, how we would manage that? We obviously – we are redeploying very actively our idle frac capacity
These are assets that we own already
And we are hiring people to operate them
And we are in a cyclical business
And it's a matter of adding proactively when you have the opportunity to catch growth and generate incremental
And if there is a headwind then we need to deal with it
No
We’re not
We are very actively working on closing out OneStim JV with Weatherford with the DOJ
There has been some additional information from the DOJ which we are now providing them with
And we are obviously optimistic that we can close this during the second half of the year
And when that’s done, we will have sufficient pressure pumping and a capacity to see us through at least 2018.
Well, we’ve always been I would say focused on sustainability, the impact we have on the environment around us in terms of our operation, but also the positive impact we live in the various communities that we are part of around the world
What we haven’t done up until the last couple of years is to really document this and put this together into something that we can present to governments, as well as to the investor base
And I think that’s the main focus that we’ve had now over the past few years
There’s also a certain report and certain things that we do become part of in order to get certain certifications and rankings in terms of what our efforts are
So over the past couple years we have put that together into the report, which is then available both to local communities, governments and to the investment community where we really summarize and demonstrate what is long-term commitment is all about
And we understand the importance of this for the investment community for instance around what part of the investment community are interested ---+ invested in the company where the focus on sustainability is obviously a key decision criteria
So we’ll see the importance of it
It's not something new that we started off
But we’re taking the effort of putting together our efforts so there are much more transparent in summary
Well, I haven’t looked exactly what our competitors are doing here
What we are doing is something that we believe in and that we’ve done for a long time
And I said the main thing we've done now is to just summarize it, and whether that’s a competitive advantage or not
Maybe it is but we haven’t done it for that reason
We’ve done it because we believe in it and it's something in very worthwhile for us to do
I think in the international markets, I would say whether – I mean ---+ if the growth rate there is higher, it would be ---+ I would say easier to generate higher incrementals
So we have a very good I think handle on the supply chain there
As we have in the U.S
as well, but the rate of inflation in the U.S
is always a lot quicker for significant activity increases
So, I would say that to get incrementals, higher growth rates would be ---+ would make it probably easier to do it provided that we have a good handle on the supply chain
But the key for the 65% incremental, so is that we need to have some pricing
And also those incrementals will kick in when we have kind of transitioned business from part of it basically being still in decline and battling some pricing issues
We need to firmly reach bottom in all aspects of the business and then start recovering from there including pricing
But the so far when we look at incrementals company wide for Q2 around mid-30s is I would say acceptable at this stage
I don’t it's fantastic
And it's something that we have a very strong focus on going forward
And as we start to I would say, complete the last part of the bottom of the cycle, I’ll expect that we get close to these incrementals that we had promised
Thank you
If <UNK> is not there maybe we can skip to the next one
Hi, <UNK>
Well, if you look at Q3 in terms of the business we expect to see continuation of the trends that we saw in the second quarter
So, for North America that means continued solid growth
We expect the rig count to continue to grow in Q3, although likely slow in somewhat in pace
We expect to see additional pricing and share gains in directional drilling and as I mentioned earlier we will continue to activate or reactivate frac capacity at the same rate as we did in Q2. Internationally, we also expecting to see a continuation of these encouraging signs we saw from Q2. We do expect single-digit sequential growth in ECA and MEA and actually most of the deal markets in these two areas will see growth we expect in Q3. But due to activity mix and some completion of projects we likely see a slight drop in Latin America in Q3. So, I would say, combining all of this I believe that the current Street consensus for Q3 is a good starting point
Yes to comment on 2018, I think like you say is still too early
In terms of where we sit at the company and I’ll comment on the overall in a second, but I think if you look at our position in North America land we have never been better positioned to capture growth both in the drilling manufacturing business
And internationally with some of the recent moves that we just announced plus the overall step out we’ve had in total addressable market we are extremely well positioned to capture growth in every corner of the world as the global investment eventually will start to increase right
So, I will say the short term risk from the trends that we are currently seeing I think would be that, that there is still I would say issues around how the markets sees inventory gross
So far in July it’s been very positive in particular in the U.S
and if this continues I think that should bode well for a gradual increase in oil prices in the second half of the year
But as a matter of how fast the U.S
producers are putting barrels on the market and also what’s going to be important is what OPEC and Russia does you know come the end of the 9 month production cut period, right
So I think there is issues around or risks around how they interplay between the U.S
producers on one side and the Russia OPEC producers on the other side, how they play this out over the next I would say year or so, we are very clear in our view that you go 2019 and 2020 we are going to have potentially significant supply challenges
So the fact that global investments will come up in that period I think is very clear
What’s going to happen in the period before we get there is going to come down to the plans of OPEC and Russia on one hand and the U.S
Thank you
Yes, I am disappointed but not going straight international
But I think that some of the very large opportunities that we see here at the moment and we are working on actively at this moment are actually right in North America
Apart from those there are significant projects coming up in discussion in the Middle East that might not strike you as the first place for SPM to take place but also there we have significant opportunities and apart from that it is going to be more of Asia, more of Africa those are the key type of areas that we are looking at the moment
But I don’t think you can underestimate the impact that SPM can have on North America
Well I will say the following that the OneStim JV isn’t focussed on the next couple of quarters
We did this because we have the medium to long term view on the North American land market
There might be challenges overall in terms of the volume of the market but I think there is still going to be a significant core that’s going to withstand you know oil price challenges and still going to be profitable
And I think the combination of scale and efficiency and technology that we will bring and vertical integration is going to make OneStim very very competitive in any kind of market condition
So, obviously if activity was to flatten out for a period of time when you come early into 2018, then we will deploy what makes sense to deploy and the rest we will keep idle and ready for deploying later
So, we are not doing this for the next couple of quarters we are doing this for the medium to long term
I think if we stay in this environment for a long period of time, I think you will unlikely see large infrastructure projects whether it’s a significant gap between cash outlays and cash returns, but I still think that even in deep water there are opportunities for tiebacks and utilization of existing infrastructure tiebacks using you know multiface pumps and so forth, right
So there are opportunities that we are seeing through one SubSea which actually isn’t all concentrated on shallow water
There is a fair bit of deep water projects being considered unprepared for FID as well
So, but I think they are going to be all relatively short cycle in nature and we obviously we have a very bit position to participate in this and support our customers in getting those projects online
All right
So thank you for that final questions
I would now like to summarize the three most important points we have discussed this morning
First, we remain positive on the oil markets inspite of the current negative sentiments that have created more uncertainty around the shape and the timing of the market recovery
We believe that globally E&P investments will need to increase significantly in the coming years to address the pending supply challenges resulting from three years of under investments
And Schlumberger is uniquely positioned to capture growth in all markets as global investments start to recover
Second, we have shown you why we believe in the potential of Schlumberger production management to provide an activity baseline to geomarket operations that also delivered full cycle returns that are highly accretive to our business
And third we are continuing to build out our offering both in terms of technology and geography
The OneStim joint venture with Weatherford add scale and technology to our integrated production services in North America land while our agreement to acquire a majority stake in EDC in Russia offers significant opportunities to expand our presence in the conventional land drilling market in <UNK>ern Siberia
That concludes today’s call
Thank you for participating
