Any investor who wants a master class on what's going on in the global oil market needs to listen to Schlumberger's (NYSE: SLB)conference calls. Not only does Schlumberger have the global footprint that gives it deep knowledge of the market, but its management team is more than willing to share its thoughts. Many of this quarter's themes were similar to the prior quarter's call, but there were a couple of key points to add to the story.
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Here are a few snippets from Schlumberger's most recent conference call that are shaping how its management team views the market today and how it should help mold investors' perception of investing in oil and gas in the future.
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First signs of real promise
One of the more important metrics for oil services companies, especially those that operate under long-term contracts like Schlumberger, is the book-to-bill ratio. This ratio is a quick and dirty way to understand how much new business is coming in compared to current activity levels. Ideally, investors want to see a book to bill of 1.0 or better at least, as that is a sign the company is maintaining its current activity levels and growing this business.
In this regard, the first quarter brought some surprisingly good news. According to CFO Siman Ayat, this was the first quarter where Schlumberger's book-to-bill ratio for its long-cycle businesses was greater than 1.0 -- it was just 1.1, but still. This was the first time since Q4 of 2013 that Schlumberger posted a better than 1.0 book-to-bill ratio.
Let's keep this in perspective, though. Revenue for the company has declined more than 50% since the top of the previous cycle, so the hurdle to post that book-to-bill feat has fallen for almost four years. While investors can cheer that these businesses are back on the upswing, it will take several quarters of higher than 1.0 book-to-bill ratios to get back to pre-crash levels.
Some markets are responding slower than others
What is even more interesting about that little data point above is that Schlumberger is still experiencing some declines in its major markets. Several international markets -- where more than 70% of Schlumberger's revenue derives -- have yet to pick back up again. That, according to CEO Paal Kibsgaard, could lead to a supply shortage in the coming years:
Schlumberger's improved book-to-bill ratio combined with the less-than-healthy investment levels in the industry today suggest that Schlumberger is capturing a significant share of the limited amount of work going on today. The company was recently contracted to supply the subsea production system for BP's Mad Dog 2 development program, which was one of the larger contracts awarded in the first quarter of the year.
Addressingthe weakest portion of the portfolio
The weakest link in Schlumberger's geographic footprint is its North American onshore market. Its largest competitor -- Halliburton -- has a dominant market share, and its current asset portfolio doesn't generate the high rates of return that some of its offshore and international services can get. To improve returns for this particular part of the business, Kibsgaard explained some of the company's thinking behind why it decided to join forces with Weatherford International(NYSE: WFT) to establish the OneStim joint venture:
Getting into the head of OPEC
To understand the dynamics of the global oil market, investors need to keep track of the investment levels of international oil companies (IOCs), especially those in the Middle East, because of their incredibly large production portfolios. This is one of the most valuable aspects of Schlumberger's conference calls because the company has deep ties as a primary service provider to the IOCs. When an analyst asked Kibsgaard what he was seeing from these larger customers, he said many of these groups are still hesitant to commit large spending amounts to new projects:
Over the next few months, we should expect some pivotal decisions about whether OPEC wants to maintain its lower production levels as well as some major FIDs. According to Schlumberger, we should see a considerable uptick in spending in the second half of 2017, but that will be very much predicated on the short- to medium-term outlook for oil prices. If new, quick-to-market sources such as shale continue to increase production and keep prices low, larger project spending could be delayed even further and set us up for an even more drastic medium-term supply shortage.
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