Schlumberger Cancels New Year: Liam Denningby
Ladies and gentlemen, 2016 has been canceled. Thanks for coming.
Schlumberger, the oilfield services giant, sure knows how to kill the mood -- which wasn’t great in the oil patch anyway. Its third-quarter results, reported late on Thursday, were broadly unremarkable. The company beat earnings estimates slightly, largely at the tax line, and displayed the resilience that investors have come to expect, with margins holding up and $1.7 billion of free cash flow. Good for them.
But the commentary that followed on Friday morning’s analyst call will take what little air there was out of the oil industry’s sails.
Schlumberger effectively wrote off the idea of things getting better next year. It will take more charges in the current quarter as it cranks up efforts to cut costs again, and that will hit earnings. It expects first-quarter earnings next year to be lower still. It hopes that will mark the bottom, but cannot say for sure, as “visibility” has dropped in the past couple of months. Recovery in the exploration and production activity that the company serves is likely to be “a 2017 event.”
Schlumberger’s customers are hurting badly a year into an oil price crash. The company expects E&P investment globally will fall again next year, marking the first two-year decline in about three decades, it says. It expects pricing pressure to persist for oil services firms as E&P companies squeeze every discount they can from them. It is safe to say rival Halliburton probably isn’t looking forward to its own analyst call on Monday.
Only in the oil-producing powerhouses of the Persian Gulf states is E&P investment showing resilience. And that’s just about the last thing the U.S. oil industry needs to hear: It is precisely the rise in cheaper Middle Eastern production that is keeping a lid on prices and squeezing margins.
There was a hopeful element to Schlumberger’s message, albeit not for all. As the squeeze intensifies next year, and as some E&P companies likely finally reach the limits of funding, more barrels will come off the market, setting up a recovery in prices. Consolidation via mergers -- and Schlumberger itself will be on the prowl -- or bankruptcy mean that not everyone will be invited.
Moreover, Schlumberger suspects, probably correctly, that the scars from this year will take a long time to heal. So there will be a lag between oil prices stabilizing and E&P companies actually committing to drill again.
That should raise some doubts around the thesis that U.S. shale can fully assume the role of swing supplier in the global oil market, which has implications for future price volatility. In particular, it raises the prospect of a potential oil price spike in the next few years. That should worry economists, with the U.S. now in the seventh year of a shaky recovery.
For oil investors, it means committing themselves to the idea of a recovery is likely something that can wait until next year. There’s just too much chop to get through in the next six months, at least.
(This column does not necessarily reflect the opinion of Bloomberg LP and its owners.)