Schlumberger: $3 Billion Asset Write-Offs Give Me Pause

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Schlumberger CEO Paal Kibsgaard

Schlumberger (SLB) delivered solid Q4 results Friday. The company beat on revenue and eps. The stock ended up slightly on the news, in line with broader markets. Below is my takeaway on the quarter.

North America Was Not As Strong As Expected

North America land drilling has been the white hot sector of the oil services industry. For the week ended January 12, 2018, the U.S. rig count was up over 40% Y/Y and up by 15 versus the previous week. However, the rig count was practically flat compared to 939 at the end of Q2. Schlumberger’s total revenue was up 3% sequentially; however North America was only up by 8%. That pales in comparison to Q3 18% growth from North America.

Management touted the additional fleet redeployments at OneStim and increased product sales from Cameron’s Surface and Drilling Systems. With oil prices hovering near $70 I expected double-digit revenue growth from the region. If oil prices stagnate or the rig count plateaus Q4 might be as good as it gets for North America.

Revenue from Latin America was stalwart this quarter, up 9% Y/Y. Drilling activity in Argentina and Columbia was robust. Higher project volume from Schlumberger’s OneSubsea also contributed to the increase. OneSubsea provides equipment for the subsea oil and gas market. Oil prices at or above $70 could awaken the subsea market and make Schlumberger’s acquisition of Cameron pay off in spades. It could also potentially provide the next catalyst for the company and help differentiate itself from land drilling competitors.

EBITDA Margins Faltered

Prior to the sharp oil price decline in the second half of 2014 Schlumberger had EBITDA margins in the 29%-30% range. Margins diverged to the downside after oil prices fell; it also acquired Cameron, which had margins in 18%-20% range, in Q3 2015. Margins have been in the mid-to-low 20% range since Q2 2016, and fell to 20% this quarter. What gives me pause is that margins fell despite the sequential increase in revenue and continued head count reductions by management.

Cost of sales ticked up 2% sequentially, which implies Schlumberger could be working harder to achieve top line growth. The company could be offering some price concessions, particularly in North America, where the rig count appears to have plateaued. Schlumberger also exited the seismic acquisition business which was beset by generic technology:

It has also become clear to us that our customers are unwilling to pay a premium for our differentiated seismic measurement and surveys, and they clearly believe that generic technology and performance is sufficient. In general, this approach commoditize the seismic data acquisition business and creates a very low technical barrier to entry for smaller players, who steadily adds vessels and keep the market in a chronic state of overcapacity.

We are therefore reached the conclusion that the seismic acquisition business cannot provide the full-cycle returns we require in terms of operating margins, free cash flow generation and return on capital employed nor can it compete for our internal allocation of R&E funding for capital investments.

This exit could potentially lead to higher margins going forward without a substantial loss in revenue.

$3 Billion In Write-Offs Did Not go Unnoticed

Schlumberger had over $3 billion in write-offs during the quarter, which did not go unnoticed. About $1.4 billion was related to the write-off of the seismic acquisition business. Another $938 million was related to write-down of investments in Venezuela. Management said it would continue to maintain a presence in Venezuela. However, the asset write-off likely reflects the deep economic problems facing the country, which could metastasize to the rest of Latin America. With Weatherford (WFT), Schlumberger, Halliburton (HAL) and Baker Hughes, a GE Company (BHGE) in hot pursuit, Latin America could become the next major battleground for new business.

Conclusion

Q4 was a mixed quarter for Schlumberger. At 17x trailing EBITDA I rate the stock a hold.

 

Actor Chad L. Coleman Hosts Trump And The Global Economy February 6, 2018 in Brooklyn.

The panel will include Christopher Townley (land baron), Reverend Conrad Tillard (activist, WHCR 90.3 FM), Wuyi Jacobs (AfrobeatRadio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead. The event will take place at South Oxford Space in Fort Greene, Brooklyn from 6PM – 8PM. Tickets are available on Eventbrite. Come early and bring friends.

Coleman is best known for his breakout role as Tyreese in The Walking Dead and Dennis ‘Cutty’ Wise in The Wire. He currently recurs on Syfy’s The Expanse and will star in Lifetime’s upcoming biopic Michael Jackson: Searching for Neverland set to premiere May 29. According to Ralph Baker who helped found the event

“We are excited to work with Chad to help spread the word about Trump And The Global Economy. These are trying times we live in and the community is dependent on artists like Mr. Coleman to continue to tell our stories through their music, film, plays, books, etc. Brooklyn has a Rich, vibrant, art community. We would love for the art world and the broader community come out to network and take in what the panel has to say.”

The town hall brings together a cross-section of individuals to discuss everything from President Trump’s policies on economics, immigration, and foreign affairs, to what his election says about America. Individuals on the front lines will bring you real information about the Trump administration that impacts the community.

Trump and the Global Economy hosted by actor Chad L. Coleman

The most recent Trump And The Global Economy town hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Mr. Jacobs and Mr. Baker. The event was well-received by the community. We parsed through President Trump’s proposed tax plan and high net worth individuals could potentially game the system by shifting income around. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?

The June 27 2017 event included Mr. Tillard, John McLaughin, who did the polling for President Donald Trump during his presidential election, Mr. Jacobs and Mr. Baker. Trump And The Global Economy is a quarterly event and is fast becoming the “must see” event in Brooklyn.

Live Stream Available February 6, 2018 At 6PM

Live stream for the February event is below. The live stream will be active February 6th at 6PM.

 

 

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