A late year drop in oil prices as U.S. shale production surged, rising U.S. interest rates, an equity market selloff and the negative impact of geopolitics on global supply and demand collided to cause what Schlumberger (NYSE: SLB) CEO Paal Kibsgaard called a near-perfect storm by year-end 2018.

But the head of the world’s largest oilfield service company believes market conditions will improve this year after a rough start, though oil price volatility has clouded the 2019 E&P spending outlook with more companies expected to guard their wallets and exercise capital discipline. Signaling better months ahead, Kibsgaard pointed to production cuts by OPEC and Russia taking effect and rising oil prices among other factors.

Oil prices are rebounding from their fourth-quarter fall. The price for a barrel of Brent crude plummeted from above $80 in September to around $51 by the end of December. Reuters reported Jan. 18 that futures were on track for a third straight week of gains, with Brent crude up to $62.82 just before midday, with U.S. West Texas Intermediate crude futures were up to $53.77.

“From our customer discussions we are seeing clear signs of E&P investment sentiments starting to normalize in the various parts of the world and heading towards a more sustainable financial stewardship of the global resource base,” Kibsgaard said on an earnings call Jan. 18. “In the international markets, outside the Middle East and Russia, this means that after four years of underinvestment a focus on maximizing short-term cash flow, the NOCs and independents are starting to see the need to invest in their resource base simply to maintain production at current levels.”

Schlumberger anticipates regions including Africa, Asia and Latin America will lead international growth. In addition, “solid but more nominal growth” is expected in the North Sea, Russia and Middle East regions.

That growth could bode well for Schlumberger, which gets most of its revenue from international markets. The company reported Jan. 18 a fourth-quarter 2018 profit of $498 million with revenue of $8.18 billion, compared to about $8.179 billion a year earlier. Revenue was down 4% sequentially.

Schlumberger said international fourth-quarter 2018 revenue rose by 1% to $5.283 billion, while North America revenue fell 12% to $2.820 billion, compared to third-quarter 2018. Looking year over year, revenue from its North America business increased slightly by 0.3%, while international revenue rose nearly 1%.

Negatively impacting sequential performance was a 25% fall in fourth-quarter revenue from its OneStim hydraulic fracturing businesses amid a slowdown in demand. Infrastructure constraints have prompted oil producers, particularly those in the Permian Basin, to delay completing wells and pull back on fracking.

“Schlumberger’s fourth-quarter results reflected headwinds from the stall in U.S. onshore activity and associated weaker pricing,” Pete Speer, Moody’s senior vice president, said in a statement.

Looking forward, the company expects E&P investments from North America land E&P operators will be closer to levels that can be covered by free cash flow. If companies maintain capital discipline and oil prices recover, E&P spend in U.S. land is expected to be flat or slightly lower than 2018, Kibsgaard said.

“In this scenario it is likely that the E&P operators would gradually lower drilling activity and instead focus investments on drawing down the large inventory of drilled uncompleted wells,” he added. “This approach would still drive production growth from U.S. land in 2019 but likely at a substantially lower rate than the 1.9 million barrels per day seen in 2018 and potentially with a further reduction in the growth rate in 2020.”

Schlumberger expects full-year 2019 capex of between $1.5 billion and $1.7 billion, versus $2.2 billion in 2018, driven by lower spending in North America.

“The downward guidance for 2019 capital expenditures helped solidify the dividend is safe,” said Brian Youngberg, a senior energy analyst for Edward Jones.

Speer added that “the company’s cautious guidance for 2019 incorporates tepid oil prices and is consistent with our view that oilfield services companies will experience a tough start to the year before earnings grind higher in the second half. Importantly, Schlumberger generated free cash flow in the quarter and reduced its net debt position with a commitment to cover all its business needs in 2019 with cash flow and avoid increases in net debt.”

Schlumberger reported fourth-quarter cash flow from operations and free cash flow were $2.3 billion and $1.4 billion, respectively. This brought full-year cash flow from operations tally up to $5.7 billion and the year’s free cash flow up to $2.5 billion.

Shares of Schlumberger rose more than 7% to $44.56 in midday trading.

The company also anticipates a rise global inventory levels in second-half 2019, strengthening the global supply and demand balance. Kibsgaard pointed out flexibility in the company’s 2019 operating plan gives it “the means and confidence to effectively tackle any investment and activity scenario” as it works to capitalize on international growth opportunities.

“The foundation for our 2019 plans is a clear commitment to generate sufficient cash flow to cover all our business needs without increasing net debt after a very strong free cash flow performance in the second half of 2018 where we generated $1 per share in the fourth quarter alone,” he said. “We are confident in our ability to further improve on this in 2019.”

Reuters contributed to this article. Velda Addison can be reached at vaddison@hartenergy.com.