Company overview - Schlumberger N.V. provides technology for reservoir characterization, drilling, production and processing to the oil and gas industry. The Company's segments include Reservoir Characterization Group, Drilling Group, Production Group and Cameron Group. The Reservoir Characterization Group consists of the principal technologies involved in finding and defining hydrocarbon resources. The Drilling Group consists of the principal technologies involved in the drilling and positioning of oil and gas wells. The Production Group consists of the principal technologies involved in the lifetime production of oil and gas reservoirs and includes Well Services, Completions, Artificial Lift, Integrated Production Services (IPS) and Schlumberger Production Management (SPM). The Cameron Group consists of the principal technologies involved in pressure and flow control for drilling and intervention rigs, oil and gas wells and production facilities.

SLB Details
 
Operating Margin Expansion led by Production and Drilling Groups in Q2FY17: Schlumberger Limited (NYSE: SLB) reported 8% qoq (quarter-on-quarter) revenue growth at $7.5 billion while posting 25% growth in pre-tax operating income at $950 million. Moreover, Production Group revenue increased 14% sequentially, driven by the accelerated land activity growth in North America, while Reservoir Characterization Group revenue grew 9% led by WesternGeco and Testing & Process. Drilling Group revenue increased by 6% while Cameron Group revenue increased 3%. On the other hand, North America land rig count increased more than 150% versus the same period last year while the international land rig count was flat. However, the North America offshore rig count decreased by 26%, and the international offshore rig count was lower by 12%. Pre-tax operating margin increased 175 bps to 12.7% sequentially, due to improved profitability in North America driven by accelerated land activity growth that benefited the Production and Drilling Groups.


Income statement (in millions, except per share amount); (Source: Company reports)
 
Reservoir Characterization Group:  Reservoir Characterization Group revenue increased 9% sequentially to $1.8 billion (78% came from the international markets) due to higher WesternGeco multiclient seismic license sales, further progress for Testing & Process on early production facility projects in the Middle East, and higher drillstem test activities in the United Arab Emirates. Additionally, Wireline revenue also grew from the seasonal activity rebound in the Russia & CIS and North Sea regions, as well as from the start-up of offshore exploration projects in the Sub-Sahara Africa GeoMarket. Pre-tax operating margin of 17% was essentially flat sequentially as the increased contribution from high-margin Wireline exploration activities was offset by reduced profitability in Testing & Process due to increased project costs. Importantly, Reservoir Characterization Group performance was enhanced by Integrated Services Management (ISM) operations, where specially trained project managers provide scheduling, planning, and activity coordination for the Schlumberger product lines involved in a project.


Reservoir Characterization Group operating performance; (Source: Company reports)
 
Drilling Group revenue boosted by seasonal rebound in the Russia & CIS regions: Drilling Group revenue of $2.1 billion (74% came from the international markets) increased 6% sequentially, due to the seasonal rebound in activity in the Russia & CIS and North Sea regions and strong directional drilling activity in US land. The demand for directional drilling technologies in US land was also higher as well design and longer laterals required advanced rotary steerable systems and innovative drillbit technologies to drive well productivity. However, these increases were partially offset by the seasonal spring-break up in Western Canada and lower offshore activity in the US Gulf of Mexico. Pre-tax operating margin of 14% increased 278 basis points (bps) sequentially due to increased volume and pricing improvements from the greater uptake of Drilling & Measurements and Bits & Drilling Tools technologies in US land, although this was partially offset by pricing pressure in the US Gulf of Mexico and in the international markets. Further, Drilling Group performance in the second quarter was strengthened by a combination of IDS operations, which provide project management, engineering design, and technical optimization capabilities.


Drilling Group operating performance; (Source: Company reports)

Production Group: Production Group revenue grew 14% sequentially to $2.5 billion (59% came from the international markets), led by strong hydraulic fracturing activity and a sustained pricing recovery in North America land as completions activity intensified and stage counts increased by 26%. Notably, in US land, hydraulic fracturing revenue grew 68% through the fast-track deployment of idle capacity as unconventional land activity accelerated during the quarter. International revenue was also higher on the seasonal activity rebound in China and in the Russia & CIS region, while revenue in Argentina increased on unconventional land activity. SPM (Schlumberger Production Management) posted a sequential increase from the seasonal recovery in China, although this was partially offset by the decline in revenue in Ecuador due to lower production from the SPM Shushufindi project. Pretax operating margin increased by 382 bps to 8.9% sequentially due to increased activity and pricing recovery on land in North America. Despite the significant costs incurred in reactivating multiple fleets in the second quarter, the hydraulic fracturing business in North America was profitable for the first time since the first quarter of 2015.


Production Group operating performance; (Source: Company reports)
 
Cameron Group: In April 2016, Schlumberger acquired Cameron Group by acquiring all the outstanding shares of Cameron, a leading provider of flow equipment products, systems and services to the oil and gas industry worldwide. Schlumberger issued approximately 138 million shares of its common stock, which were valued at $9.9 billion and paid $2.8 billion in cash. Prior to being acquired by Schlumberger, Cameron reported revenue of approximately $1.6 billion during the first quarter of 2016. Cameron Group revenue increased 3% sequentially to $1.3 billion (59% came from International markets), driven by Surface Systems and Valves & Measurement activity in US land, which grew at the same rate as the well count. The US land growth, however, was partially offset by reduced US Gulf of Mexico activity for Drilling Systems and OneSubsea. Further, International revenues declined slightly due to reduced project activity for OneSubsea and Drilling Systems. Pre-tax operating margin of 13.8% slightly improved sequentially, as increased project volumes & product sales and continued strong project execution in OneSubsea more than offset the impact of falling product backlog in Drilling Systems. During the second quarter of 2016, Schlumberger recorded $2.573 billion of asset impairment and workforce reduction charges and $335 million of charges associated with the acquisition of Cameron.


Cameron Group performance (Source: Company reports)
 
Cameron Drilling Systems and M-I SWACO collaborated on product development to deliver the industry’s first original equipment manufacturer deepwater managed pressure drilling (MPD) system. The integrated solution is comprised of a riser joint, surface manifolds, a single control system and umbilical, and other equipment. To date, Schlumberger has received orders for four of the systems, the first was delivered in May 2017 and the other three will be delivered later this year.

Payment delays due to lower oil prices: Recently, Schlumberger announced that it would reduce its activity in Venezuela to align operations with cash collections because of insufficient payments received in recent quarters. As of June 30, 2017, Schlumberger’s net accounts receivable balance in Venezuela was approximately $0.5 billion, which excludes the $0.2 billion carrying value of the promissory notes. Further, the company continues to experience payment delays from certain other customers as well, primarily as a result of the impact of lower oil prices in the oil and gas industry. Research & engineering costs for the second quarter of 2017 and the six months ended June 30, 2017 have decreased as compared to the same periods in 2016 by $61 million and $91 million, respectively, as a result of cost control measures, offset in part by the impact of the Cameron acquisition. Capital expenditures stood at $0.9 billion during the first six months of 2017 compared to $1.0 billion during the first six months of 2016, while for full-year 2017, the same are expected to be approximately $2.2 billion as compared to expenditures of $2.1 billion in 2016. On July 18, 2013, the Schlumberger Board of Directors approved a $10 billion share repurchase program to be completed by June 30, 2018.
 
Stock performance: The shares of SLB have declined about 21% in the last one year as on August 31, 2017, owing to lower oil prices, and are now trading at low levels. However, the company maintains a decent balance sheet among the peers with $6.2 billion in cash. Further, the company provided robust outlook led by North America for the second half of the year while witnessing more positive signs in the international markets with increases in activity and new project plans starting to emerge in several GeoMarkets. The strengthening in the international markets has so far been concentrated around land activity in Western Siberia and in the OPEC Gulf countries but the group is now witnessing an increasing number of new offshore projects being prepared for tendering and final investment decision (FID) in many of the world’s shallow water basins. Further, the acquisition of Cameron has led to a good integration of SLB’s deep reservoir of subsurface knowledge and expertise with Cameron’s industry leading drilling and production systems. Given the ongoing improvement in operating activities and optimistic outlook over a long-term, we give a “Buy” recommendation on the stock at the current market price of $63.39.


SLB Daily chart (Source: Thomson Reuters)

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