Kibsgaard also dismissed the idea that the North American oil-field service market would ever return to the peak margins achieved during the previous up-cycle, citing the poor financial outlook for exploration and production companies and their partners in the oil-field service industry:
I think there are some questions and challenges to be asked, right? How is the industry in the next upcoming cycle going to be able to operate with the entire value chain and start being cash flow and profit positive as we enter into a completely new cycle?
That was not the case in the previous cycle, and I don’t think we can go on for many cycles in a similar type of fashion. Now, there is a part of North America land which is viable, even at lower prices, but how big that is and how much you can step up from the core acreage is to be seen.
Kibsgaard goes on to argue for a fundamental transformation of the shale industry that involves service firms working more closely with producers to develop new technologies and processes that improve operating efficiency.
Once again, Schlumberger’s CEO advocated for an evolution of the pricing model that involves service companies participating with customers on wells or includes performance-related bonuses.
However, Kibsgaard also acknowledged that although integrated project management has gained traction in international markets, interest in these contracts remains low in North America. The oil-field service industry in the region remains highly fragmented, with different companies providing drilling rigs and individual service functions involved with drilling, completing and maintaining wells.
In many international markets, Schlumberger granted temporary pricing concessions that either expire at the end of a certain period or are linked to oil prices. The company aims to claw back these concessions over the next few quarters—a challenging prospect with less cash flow to divvy up throughout the value chain.
Management also indicated that Schlumberger will pass on work that doesn’t offer viable economics and expressed a willingness “to engage in different types of collaboration” to drive out unnecessary costs.
Schlumberger historically has taken a less bullish stance on the North American market than Halliburton because this region accounts for less of its overall business.
Nevertheless, comments from Schlumberger, Halliburton and Baker Hughes’ (NYSE: BHI) management teams suggest that investors remain overly optimistic regarding the pace, timing and magnitude of the recovery in the North American oil-field services market.
Although the US onshore market appears to have stabilized, the massive overcapacity in the region and the need for further efficiency gains suggest that the complexion of the recovery may disappoint investors expecting a V-shaped rebound.
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Elliott and Roger on Nov. 26, 2019
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