Schlumberger's management team recently spent an hour with analysts and investors on a conference call to discuss the company'sfirst-quarter results. In addition to discussing those results, the management team also spent a great deal of time discussing what it's seeing in the oil market. Here are five things Schlumberger's CEO said about the industry that really stood out.
Unprecedented slowdownCEO Paal Kibsgaard spent a lot of time on the conference call talking about the current downturn. One of his more interesting comments was about the speed at which things went south:
Kibsgaard notes that the market worsened beyond its own expectations. This forced the company to quickly revise its plans, including the announcement of a new round of layoffs as it works to cut costs.
Unsustainable market pricing for servicesIn addition to how fast the oil market went from bad to worse, Kibsgaard noticed that some of his peers were acting irrationally:
Some of Schlumberger's peers have cut their prices so steeply that they're basically working at cash break-even, or even at a loss just to stay busy. This was somethingHalliburton noticed as well. Both companies view this practice as unsustainable and are therefore being very disciplined by focusing on running their businesses at a profit even as others are not.
Industry's greatest challengeKibsgaard then turned his attention to other issues within the industry. One issue in particular is the fact that costs in general had gotten out of control as oil companies were being weighed down by high-cost projects that weren't producing economic returns, even at triple-digit oil prices. Because of this Kibsgaard noted:
While high oil prices will improve the cash flowof oil companies, it won't solve all of their problems. Instead, the industry really needs to work together to create new solutions to bring down the costs of mega projects, like deepwater projects, to create more value out of them. Schlumberger hopes to be a big part of that solution.
Outlook on oil-field service activityLooking a bit more near term, Kibsgaard also provided his outlook for industry activity levels in 2015:
Both Schlumberger and Halliburton don't have a whole lot of visibility in 2015, as neither is sure when oil and gas drilling activity will improve. Further, both believe that when a recovery does come, it will be a bit more muted because of the large inventory of wells that have been drilled, but not completed. While that's just deferring revenue, it will still slow the pace of the recovery, at least initially, while the overall view is that it will be quite a while before activity reaches a new peak.
Macro thoughtsKibsgaard then turned his attention to a more macro view of the oil market in general at the request of an analyst on the call:
Everything in the oil market is basically playing out as the company expected it would. Demand growth for oil is much stronger than last year, as lower oil prices are spurring incremental demand. Meanwhile, oil supplies are tightening as reduced investment, especially in North America, is leading to less robust production growth, with the potential for declining production in the U.S. in the second half of this year. That's stabilizing oil prices at the moment and could lead to an improvement in pricing by the end of the year.
Investor takeawayRight now, times are tough. The downturn has been faster than expected, which is causing some oil-field service providers to act irrationally. Moreover, there are still issues remaining as the cost structure in the industry needs to be fixed, and a recovery is still not yet on the horizon. That said, the overall oil market is healing itself -- slowly but surely.
The article 5 Things Schlumberger Limited's CEO Is Seeing in the Oil Market originally appeared on Fool.com.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Halliburton. The Motley Fool owns shares of Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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