Schlumberger Limited recently reported second-quarter results that were less awful than expected. In fact, the case could be made that the company is really doing an exceptional job managing the downturn. That's certainly the case the company's management team made on its second-quarter conference call. In fact, CEO Paal Kibsgaard emphasized this at the very end of that call by summarizing the three key points the company wanted to drive home to investors. Here are the "three most important points" that the company's CEO wants investors to know.
1. We're having our best downturn everKibsgaard began his closing remarks by saying,
Kibsgaard notes that market conditions deteriorated further in the second quarter as the U.S. land rig count dropped. He had noted earlier in the call that the drop was 40% over just the prior quarter; however, despite that plunge Schlumberger's revenue in North America only fell 27% sequentially. Not only did revenue hold up much better than expected, but margins weren't squeezed as much as in prior downturns. He pointed this out by comparing this downturn's rig count drop to the last by saying the recent drop
What he is suggesting is that while this downturn is much deeper and happened faster than the one in 2009, Schlumberger's margins have held up much better, falling only 37% compared to more than 70% last time. This is because the company has proactively managed what it can control, namely its costs, and is therefore now coming out ahead.
2. Our transformation program is workingThe second thing Kibsgaard wanted investors to know was that,
Earlier in the call Kibsgaard reminded investors that it was one year ago that the company unveiled its transformation program, which he said was, "designed to provide a new approach to how we run our business in order to enable fundamentally better performance." It's a program that is designed to deliver better cost management, better product quality, and better service deliverability, meant to drive strong free cash flow generation for Schlumberger. It's a program that is working, as evidenced by the fact that margins didn't fall off a cliff last quarter, while the company also generated strong free cash flow totaling $4.1 billion so far this year, despite having to spend an extra half billion dollars on severance costs.
3. We see the bottomThe final point Kibsgaard wanted to hammer home was that he believes that the worst is over. He said that,
From what Schlumberger is seeing from the market and its customers, Kibsgaard is growing more confident that we've now seen a bottoming out of oil and gas activity. As such, the third quarter will still be weaker than this quarter due to some follow through as the market bottoms out. However, he noted earlier in the call that he only sees revenue dropping "something in the range of 5%, 6%" sequentially, while earnings "of $0.77 [per share] is a pretty realistic number." That's welcome news as it suggests that the company's results could really accelerate as we head into 2016.
Investor takeawayWhile the oil market is in the midst of one of its worst downturns in years, Schlumberger is very excited about the future. It managed this downturn better than previous downturns as it kept its cost in check while its transformation program really begins to bear fruit. Even better, the company now sees a bottom in the market and predicts an uptick in activity and its financial results starting as early as the fourth-quarter, suggesting much better days lie ahead.
The article 3 Key Points Schlumberger Limiteds CEO Wants You to Know originally appeared on Fool.com.
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