Schlumberger Second Quarter Earning Calls

Schlumberger Second Quarter Earnings Call

(Cases Study :Analysist Of Financial Strategic/Management Strategic)
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Last Update: 3:20 PM EDT July 26 2007

Re-Publish & Analysist : Zulfikar

The oilfield services company reported earnings of $1.02 cents a share, exceeding analysts’ expectations of 96 cents a share. Oilfield Services pretax margins reached a new high of 30.4% led by strong performance in the Middle East and Asia, due to a continued favorable revenue mix from exploration services. In the North American market, higher activity on land and in the Gulf Coast was more than offset by a downturn in Canada.

Investors Question and Answers

Sequential Earnings Growth Quarterly Earnings by Year Quarterly Earnings Growth by Year

Source: Company filings Q1:March Q2:June Q3:September Q4:December

This summary is based on the second quarter fiscal 2007 earnings call conducted by Schlumberger Limited (SLB: chart) on July 20, 2007.

Vice President of Investor Relations: Malcolm Theobald

Chairman of the Board, Chief Executive Officer: Andrew F. Gould

Chief Financial Officer, Executive Vice President, Treasurer: Simon Ayat

Key Investors Issues

-EPS were $1.02 a share compared to 69 cents a share last year.

- Net income was $1.26 billion compared to $856.9 million a year earlier.

- Revenue was $5.64 billion compared to $4.69 billion in the same quarter a year earlier.

Second Quarter Highlights

Net income, before charges and credits, reached $1.26 billion, an increase of 7% sequentially and 40% year-on-year.

- Earnings-per-share, before charges and credits, were $1.02 versus 96 cents in the previous quarter, and 73 cents in the second quarter of 2006.

- Net income, including charges and credits, was $1.26 billion or $1.02 per-share versus 96 cents in the previous quarter, and 69 cents in the second quarter of 2006.

Oilfield Services revenue of $4.97 billion increased 5% sequentially and 21% year-on-year. Pretax business segment operating income of $1.51 billion increased 8% sequentially and 33% year-on-year.

WesternGeco revenue of $665 million decreased 6% sequentially but increased 18% year-on-year. Pretax business segment operating income of $216 million decreased 19% sequentially but increased 28% year-on-year.

During the first half of 2007, Integrated Project Management (IPM) was awarded an $3.8 billion of new and extended contracts that cover activities in GeoMarkets spanning Latin America, Russia, North Africa, Europe and Malaysia.

This figure includes revenues from project management, Schlumberger technology delivery and third-party services.In the short term, the future natural gas activity in North America remains uncertain as record imports of LNG, a slower-than-forecast decline in Canadian gas production, and the backlog of new wells stimulated and brought on line have all led to a rapid rise in gas storage levels. In this market, pricing erosion for pressure pumping stimulation services accelerated due to increasing equipment capacity. The company continues to believe that the high decline rates of existing fields and the poorer quality reservoirs now being drilled will ultimately lead to renewed activity in the Area.Global demand for oil remains robust while non-OPEC supply continues to disappoint due largely to acceleration in the decline rate of the existing production base, delays in the new and complex projects under development, and inadequate industry investment resulting from shortages of people and equipment. The company remains convinced that international activity will continue to increase as operators combat production shortfalls and continue to increase exploration budgets to renew reserves.

As part of the current 40 million-share buyback program approved in the second quarter of 2006, Schlumberger repurchased 2.2 million shares for a total amount of $172 million, at an average price of $78.23 per share.

Under this buyback program 20.9 million shares have been repurchased to date.Schlumberger completed the acquisitions of Geosystem and Tyumenpromgeofizika. Geosystem supplies land and marine electromagnetics and seismic imaging services and will become part of WesternGeco Electromagnetics. Tyumenpromgeofizika provides a wide range of geophysical and wireline logging services in Western Siberia.

As of June 30, net debt was $2.1 billion.

Liquidity events included $172 million for the stock buy-back program, CapEx, including multi-client, of $802 million. $396 million of series A convertible debentures were converted by holders into approximately 11 million shares of Schlumberger common stock. CapEx, excluding $61 million of multi-client surveys capitalized, was $741 million and is expected to reach approximately $3.1 billion for the year 2007.

Oilfield Services

- Revenue of $4.97 billion was 5% higher sequentially, and 21% higher year-on-year.

- Sequential revenue increases were highest in the US land, Brunei/Malaysia/Philippines, North Sea, Arabian and Eastern Mediterranean GeoMarkets.

- Double-digit growth rates were experienced in the East and North Russia, Indonesia, China/Japan/Korea and Qatar GeoMarkets.

- Across all areas demand was particularly strong for Drilling & Measurements, Schlumberger Information Solutions (SIS), Artificial Lift Systems, Wireline and Well Services technologies.

- Pretax operating income of $1.51 billion increased 8% sequentially, and 33% year-on-year. The sequential increase was mainly driven by higher activity and a favorable technology mix in the Brunei/Malaysia/Philippines, Venezuela/Trinidad & Tobago, US land, Eastern Mediterranean, Gulf Coast, Arabian, North Africa and China/Japan/Korea GeoMarkets, and by a favorable technology mix and higher product sales in the North Sea. These resulted in Oilfield Services pretax operating margins reaching 30.4%, a sequential increase of 90 basis points (bps).

- To adapt the existing Schlumberger GeoMarket structure to expanding activity levels worldwide, new GeoMarkets have been established in Russia, on land in the US, and Qatar, bringing the total number to 31. The GeoMarket structure brings together geographically focused teams to meet local needs and deliver customized solutions while enabling Schlumberger to deploy technology consistently on a global level.

- The Schlumberger Wireline InSitu Density service, the first in the InSitu Family of quantitative fluid properties measurements at reservoir conditions, made its commercial debut. This new service measures formation fluid density in open hole at reservoir conditions.- In a recent offshore exploration well in Norway, water samples for subsea pipeline flow assurance and field process equipment compatibility were acquired for Eni Norge using the InSitu Density service in conjunction with the Wireline MDT Modular Formation Dynamics Tester and Quicksilver Probe technologies to ensure low-contamination representative water samples measured under downhole conditions.

- SIS released the latest editions of the Petrel seismic-to-simulation software, the Eclipse reservoir simulation software, and the Ocean application development framework. These latest editions bring enhanced seismic performance and scalability for improved exploration workflows, extended simulation capability for both carbon dioxide injection and storage and for minimizing asphaltene deposition during production, and accurate modeling of pressure drop in extended-reach horizontal wells.

North America

- Revenue of $1.34 billion decreased 3% sequentially, but increased 6% year-on-year.

- Pretax operating income of $417 million decreased 3% sequentially but increased 11% year-on-year.

- Sequentially, revenue in the US land GeoMarkets grew through increased activity following the lifting of seasonal land access restrictions, and continuing service intensity for Wireline, Drilling & Measurements and Well Services technologies on horizontal wells in unconventional gas reservoirs.

- Growth was also recorded in the US Gulf Coast driven by higher demand for Drilling & Measurements, Well Services and Well Testing technologies in deep-water reservoirs, and in Alaska as a result of higher exploration-related demand for Wireline, Well Testing and Well Services technologies.

- Higher SIS product sales were recorded across the US GeoMarkets.

- Growth in the US was more than offset by the activity slowdown in Western Canada that resulted from the early onset of the spring break-up together with the lower prices for natural gas.

- Pretax operating margins for the area declined 21 bps to reach 31.2% primarily due to the activity slowdown in Canada and to pricing erosion in pressure pumping stimulation services in North America due to increases in equipment capacity. This decline was offset by higher operating leverage in the US land GeoMarkets and a favorable exploration-driven activity mix in the US Gulf Coast and Alaska GeoMarkets.

- In West Texas, Schlumberger used an integrated design approach to optimize stimulation and completion in a new shale gas play. This integrated approach included Schlumberger Wireline logging services and the new Sonic Scanner technology, in conjunction with TerraTek advanced core analysis, to yield a comprehensive characterization of the reservoir. The study led to customization of the fracturing fluid most suited to the reservoir mineralogy and to selection of the optimal perforating technique. The results indicated the absence of barriers within the formation. This was later confirmed by micro-seismic monitoring during the stimulation treatment.

- In Western Canada, the PowerDrive Xceed rotary-steerable system was run in the Chinook Ridge field where it enabled the drilling of a horizontal well with consistent build rates in a complex and technically challenging reservoir. The deployment of this advanced directional-drilling technology enabled the operator to enhance the well''s productivity.- In northwestern Louisiana, AbrasiFRAC technology, a member of the new Contact family of intervention services, was used to complete a well where six stages were successfully placed in one day in the highly laminated reservoir where normally pressured zones alternate with highly depleted zones. The well, which was completed three days faster than wells using conventional technology, is outperforming offset wells and yielding the lowest water production rate in the field.

- In the Barnett Shale of North Texas, Schlumberger recently completed three horizontal wells for Devon Energy. New production improvements were achieved through the added dimension that Sonic Scanner advanced measurements bring to the understanding of formation stress during the completion process in this complex tight gas environment. In addition, the use of MDT technology is enabling the customer to measure the in-situ stress in an effort to understand hydraulic fracture-height growth.

Latin America

- Revenue of $761 million increased 5% sequentially, and 14% year-on-year.

- Pretax operating income of $179 million increased 10% sequentially, and 40% year-on-year.

- The two remaining contracts associated with the drilling barges in Venezuela were finalized. The resulting recognition of certain previously deferred revenues and related costs had a marginal impact on the Area''s sequential revenue and pretax operating income growth.- Sequential revenue growth was driven by increased demand for Wireline and Well Testing technologies together with higher Artificial Lift Systems product sales in the Venezuela/Trinidad & Tobago GeoMarket; strong demand for Wireline, Well Services and Well Testing technologies together with SIS and Completions product sales in Latin America South.

- Continued strong exploration-driven Wireline activity and increased demand for IPM services in Peru/Colombia/Ecuador; and stronger Well Services activity in Mexico.

- Pretax operating margins increased by 118 bps to reach 23.6% as a result of the more favorable activity mix in Venezuela/Trinidad & Tobago and Peru/Colombia/Ecuador. This performance was partially offset by project start-up costs in Mexico.

- In Brazil, Petrobras awarded Schlumberger a contract for work on the Marlim field which includes the construction of a collaborative decision center together with implementation of Schlumberger production software and workflow process optimization. This project is an extension of the Carapeba pilot development.

- In Colombia, Petrobras selected Schlumberger to provide logging-while-drilling, wireline logging and directional-drilling services for the first-ever deep-water well to be drilled in the region. This award was based on the successful track record of PowerDrive rotary-steerable and Scope advanced measurements-while-drilling technologies in Brazil.

- In Venezuela, PDVSA has achieved exceptional results using a combination of Wireline PURE and PowerJet Omega perforating technologies in new well completions and old well re-perforations. Using an engineered approach to design the system best suited to the formation for maximum productivity, a team of PDVSA and Schlumberger engineers increased the productivity index in a number of wells across the country. In one specific case, a group of 10 wells was re-perforated with production increasing by more than 14,000 BOPD.

- In Argentina, Repsol YPF awarded Schlumberger a multi-year contract extension for Artificial Lift Systems services onshore. This extension was awarded based on service quality performance, rapid product delivery and advanced technology offerings provided under the existing five-year contract.

Europe/CIS/Africa

- Revenue of $1.61 billion increased 6% sequentially, and 30% year-on-year.

- Pretax operating income of $462 million increased 7% sequentially, and 46% year-on-year.

- Sequential revenue growth was driven by the higher rig count in the East Russia, Continental Europe, Libya and North Africa GeoMarkets; strong demand for exploration-related Wireline, Drilling & Measurements and Well Testing technologies together with higher Artificial Lift Systems and Completions product sales in the North Sea, and increased demand for Well Services technologies, higher Artificial Lift Systems product sales and higher IPM activity in North Russia. This growth was partially offset by seasonal weather-related effects in South Russia.- Pretax operating margins reached 28.7% driven primarily by a more favorable activity mix in the North Sea, North Africa and Russia GeoMarkets. This performance was partially dampened by the weather-related seasonal effects in South Russia.

- In Algeria, the Schlumberger Wireline PressureXpress service was run for CNPC International Algeria Exploration to determine fluid contacts and gradients in order to improve reservoir understanding. Job execution was optimized in real time using the InterACT web-based service.

- StageFRAC multistage fracturing technology, a member of the Contact family of fracturing and completion services, was deployed on three offshore oil wells for Eni Congo. The technology, resulting in increased well productivity, proved highly effective for the customer''s stimulation campaign. StageFRAC will be used by Eni Congo on additional offshore fields, reflecting the growing acceptance of this advanced technology.

- PeriScope and EcoScope, members of the Scope family of advanced-while-drilling services, were deployed for Chevron Nigeria Ltd. in an offshore field. Results showed that the horizontal well''s oil-water contact was dipping due to down-slope water injection. The use of conventional technologies would have led to the incorrect assumption that the transition from oil to water was due to faulting. The results prevented an unnecessary sidetrack and modified the field development plan.

- Elsewhere in Nigeria, a screening study of 1,700 reservoirs was conducted for Chevron Nigeria Ltd. to identify potential candidates for water-flooding to improve production and recovery. The ranking of the reservoirs, each described by more than 200 parameters, was performed using Schlumberger DECIDE! data management software, which reduced the processing time to three months, less than with previous methods.

Middle East & Asia

- Revenue of $1.21 billion increased 11% sequentially, and 32% year-on-year.

- Pretax operating income of $428 million increased 14% sequentially, and 43% year-on-year.

- The sequential growth in revenue resulted from higher activity in the Brunei/Malaysia/Philippines, Indonesia, Qatar, Australia/Papua New Guinea and China/Japan/Korea GeoMarkets, stronger exploration-driven deep-water activity in Eastern Mediterranean, and higher demand for Wireline, Completions and Artificial Lift Systems technologies in the Arabian GeoMarket. This growth was partially offset by the lower rig count in Thailand/Vietnam.

- Pretax operating margins grew sequentially by 103 bps to reach 35.3%, driven by a more favorable deep-water exploration-driven activity mix in Brunei/Malaysia/Philippines, demand for higher-margin Wireline technology in China/Japan/Korea, and higher-margin Completions and Artificial Lift Systems product sales in the Arabian GeoMarket. This growth was offset by the slowdown in Thailand/Vietnam and lower deep-water activity in India.

- Saudi Aramco awarded Schlumberger Well Testing an order for 240 PhaseWatcher Vx multiphase flow meters for the Khurais field in Saudi Arabia, confirming Schlumberger leadership in production well testing.

- Elsewhere in Saudi Arabia, the Wireline MaxTRAC open-hole tractor conveyance system has overcome the soft formation tractoring slippage experienced in this area. In one application, the MaxTRAC technology enabled the Schlumberger Wireline Flow Scanner production logging system to be deployed in deep horizontal wells providing real-time diagnosis of oil and water entries.

- Schlumberger Well Services Coiled Tubing Catenary technology was deployed for the first time in Asia for Shell Malaysia Exploration & Production to enable coiled-tubing operations from a floating barge. This new technology increases access to wells located on lightweight or congested platform jackets.

- In India, Schlumberger Wireline performed the first P4 post-perforation propellant pulse service for extensive formation fracturing. The combination of the Wireline Sonic Scanner service with an oriented perforation technique identified the preferred fracture plane making it possible to reduce fracture pressure below the maximum limit for this particular completion.

WesternGeco

- Revenue of $665 million was 6% lower sequentially, but 18% higher compared to the same period last year.

- Pretax operating income of $216 million decreased 19% sequentially, but increased 28% year-on-year.

- Sequentially, Marine increased due to higher production and pricing despite seasonal transits and scheduled dry dock inspections.

- Data Processing revenue also increased driven primarily by higher sales in North America, Europe, Africa and the Middle East while Land revenue remained flat.

- The improvement in Marine and Data Processing revenues was more than offset by the normal seasonal decline in Multiclient revenues.

- Pretax operating margins declined to 32.5% due to the lower Multiclient sales and to crew costs associated with certain Land projects.

- The seventh Q-Marine vessel, the Western Spirit, was launched near the end of the quarter. Equipped with DSC Dynamic Spread Control, the new WesternGeco automated vessel, source and streamer steering technology that enables more accurate survey positioning, the Western Spirit began 4D survey work in the North Sea for Statoil.

- Offshore India, ONGC awarded WesternGeco an integrated Q-Marine acquisition, processing and post-stack inversion contract through the 2009-2010 field seasons. This fourth long-term Q-Marine contract for ONGC underscores their commitment to the value delivered by Q-Technology.

- Offshore Angola, Sonangol Pesquisa & Producao awarded WesternGeco a contract for a Q-Marine acquisition and processing survey over 1,800 km2. This is the first Q-Marine survey to be acquired for Sonangol.- In North Africa, Q-Land activity saw further success with the award of a second 350-km2 survey for Sirte Oil Company in Libya, and a 300-km2 survey for First Calgary Petroleum in the Berkine basin in Algeria.

- Three new technologies for land operations were introduced. The Desert Explorer DX-80 vibroseis unit complements the Q-Land integrated acquisition and processing system with low distortion across a broad bandwidth. The MD Sweep design methodology enables a vibrator to produce higher energy at low frequencies, and the SHARP technique increases productivity of slip-sweep data acquisition without suffering quality degradation due to harmonic noise.

- Under a technical collaboration agreement with Petrobras, WesternGeco has started acquisition of a controlled source electromagnetics survey in the Santos basin offshore Brazil. This survey will include both 2D and 3D acquisition, processing and interpretation.

- The third phase of the E-Octopus wide-azimuth survey commenced in May and now extends to cover approximately 10,540 km2 of the Green Canyon area in the US Gulf of Mexico. This phase, which is prefunded, has deployed a total of 20 streamers from two Q-Marine vessels, with the data processed using the proprietary Q-Xpress technique to produce the world''s largest onboard prestack depth migration. MMCI Multimeasurement-Constrained Imaging workflow technology will be applied to selected areas of the survey to improve delineation of base-of-salt events for enhanced subsalt imaging. MMCI is a WesternGeco proprietary workflow that integrates marine magnetotelluric, gravity and seismic measurements. The E-Octopus project is part of the family of E-surveys that benefit from the most advanced acquisition and processing technologies in the industry.

Fiscal 2007 Outlook

- Based on the projected geographic mix of earnings within OFS and WesternGeco for the remainder of the year, the full-year ETR is expected to be lower than last year and above the second quarter levels.

- The company expects expense to be approximately $140 million, a $26 million increase over 2006.

- CapEx, is expected to reach approximately $3.1 billion.