Schlumberger Earnings Call Insights: Costs and Delays and Q1 Pickup

Schlumberger NV (NYSE:SLB) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Costs and Delays

James West – Barclays Capital: So, clearly another good move higher this quarter for international volumes, but a little margin slippage as you highlighted. It seems to me the contract delays, the startup costs, this is all pretty transitory. Is that accurate, and if so – take out the seasonal factors I guess for a second, when do those type of sort of costs and delays – when do those abate or have they already abated at this point?

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Paal Kibsgaard – CEO: Well, I agree with you. The impact we saw in profitability in Q4 is down to mix, some of these transitory delays and seasonal slowdown as you’re referring to. So, most of these issues are more or less behind us in terms of what was unusual for Q4. We will continue to see the normal seasonal slowdown in the North Sea, Russia and China land in Q1. The only other lingering issue we have is the contractual situation in North Africa, but overall the issues that were exceptional in Q4 are more or less behind us.

James West – Barclays Capital: Then, we obviously agree with your international E&P spending outlook for this year. What do you see as the biggest growth areas for Schlumberger this year, and are there any markets that you think could be particularly challenging as well, excluding North America land?

Paal Kibsgaard – CEO: Well, if I look at international next year, we will see – more significant growth in ECA and EMEA, we will also see growth in Latin America, but the overall activity levels in Brazil is more or less flat year-over-year. So that will have an impact on Latin America growth, but if I look at ECA, we see significant growth overall in sub-Saharan Africa, where we have a very strong position and we also see quite significant growth in Russia. I would say ECA is the main growth locomotive next year, with sub-Saharan Africa and all over Russia, both land and offshore. Then in EMEA, I will say overall the Middle East, Saudi Arabia, Iraq but also Kuwait, UAE, Oman will all be very strong for us. And in Asia, it is predominantly China and Australia which is going to be driving growth.

Q1 Pickup

Kurt Hallead – RBC Capital Markets: Just wanted to maybe hit you up on the North American front. I know that there is still quite a bit of uncertainty on the U.S. land, but I think the indications are there that there is going to be a pickup in some time here in the first quarter. So, with the pickup in activity on the horizon will it be safe to assume that margins would pretty much hit their low points in aggregate for North America, land in the first quarter and if not can you just kind of walk us through how you see things evolving?

Paal Kibsgaard – CEO: I am not ready to predict exact where North America land margins are going to fall. There is one new element of uncertainty this quarter which is further pricing pressure outside of hydraulic fracturing, right. But if you look at our view on 2013 for North America, we do expect the U.S. land rig count to be up between about 100 and 150 rigs in Q1 and this is based on the feedback from our customers, so that’s in line with what you are indicating. Now, in terms of activity for the full year we still see U.S. land rig count slightly down versus 2012, while the well count will be slightly up. If you look at Canada, the rig count is already over 500 so far in January, but we still see the full year also being down in 2012 versus – sorry, down versus 2012…

Now then the major uncertainty in North America land is pricing, so it seems clear that we will continue to face oversupply of horsepower given the rig count outlook. So, we don’t really see any significant recovery in hydraulic fracturing pricing in the coming year and then you have the other uncertainty where we saw about 5% pricing drop on average in the other product lines on land in Q4. This is going to have an impact going forward, but as we said at this stage the third evolution is not clear, and I think it’s going to be a function of how quickly the rig count climbs back up going forward. So, I would say that in North America land there will continue to be margin challenges at least in the coming two quarters as far as (at the end).

Kurt Hallead – RBC Capital Markets: As follow-up, obviously the Gulf of Mexico has been a positive dynamic. Can you give us some indications of what you might expect for maybe revenue growth in the Gulf of Mexico year-on-year and is that all going to be driven by the oilfield services product line or is there going to be some combination of seismic and services?

Paal Kibsgaard – CEO: Well, we expect both the drilling related activities as well as seismic to be strong in the Gulf of Mexico for this year. If you look at the rig activity, we don’t see any major rig additions in H1 after we have the surge of, I think, seven additional rigs in Q4. But I mean overall rig activity year-over-year will be up more than 20% without Q4 addition. In terms of seismic, we are continuing to run one seismic fleet in the Central Gulf. You’ll see what happens in terms of late sales meeting up to the new sales now in March, but I’m also continuing to be positive on seismic and in Gulf of Mexico.

A Closer Look: Schlumberger Earnings Cheat Sheet>>