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Schlumberger vs Halliburton

By Elliott H. Gue on Feb. 8, 2017

Schlumberger (NYSE: SLB) reported fourth-quarter earnings and revenue that met the market’s expectations. However, management sounded a cautious note on the business environment outside North America, indicating that international markets continue to scrape along a bottom and won’t exhibit any meaningful signs of recovery until late 2017, at the earliest.

The oil-field-services giant generated about 73 percent of its annual revenue outside North America last year, compared with 57 percent for Halliburton (NYSE: HAL) and about 66 percent for Baker Hughes (NYSE: BHI) and Weatherford International (NYSE: WFT).

Management called for the North American onshore markets to be the first to recover, fueled, in part, by easing conditions in credit and equity markets over the past year.

During the 2010-14 investment boom, most US oil and gas producers outspent their cash flow, borrowing money or issuing stock to fund drilling activity.

When energy debt and equity markets sold off in late 2015 and early 2016, producers were forced to bring cash flow in line with capital expenditures. Some smaller producers with heavy debt burdens went bankrupt or were absorbed by other operators.

Other better-capitalized upstream operators—including Model Portfolio holding Anadarko Petroleum Corp (NYSE: APC)—emerged from this crisis in stronger shape by monetizing noncore assets and pursuing opportunistic acquisitions. Others have started to shore up their balance sheets by issuing equity to pay down debt.

Given that US oil and gas producers had weathered a vicious down-cycle and debt crisis in late 2015 and early 2016, many industry observers assumed that operators would be less willing to outspend cash flow and that investors would be reluctant to finance aggressive drilling programs.

Although the North American energy complex hasn’t returned to the free-wheeling days of the 2010-14 boom years, Paal Kibsgaard, CEO of Schlumberger, expressed surprise at shale producers’ ability to bounce back from last year’s full-blown crisis:

As the up-cycle begins, growth in E&P [Exploration and Production] investments will be led by North America land operators who appear to remain unconstrained by years of negative free cash flow as external funding [bond and equity market funding] seems more readily available and the pursuit of shorter term equity value takes precedence over full cycle return.

E&P spending surveys currently indicate that 2017 North American E&P investments will increase by around 30 percent led by the Permian Basin, which should lead to both higher activity and a long overdue recovery in service industry pricing.

Within North America, Schlumberger highlighted improvement in several product lines, including pressure pumping, directional drilling and drilling fluids.

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