On April 20th and 24th respectively, leading oil field service providers Halliburton Co. and Schlumberger Ltd. released their first-quarter 2009 earnings reports. Schlumberger, the world’s largest oil field services provider, saw revenue fall about 5%, to $6.0 billion, compared to $6.29 billion in the same quarter last year. First-quarter profit fell 30% on income of $938 million. The company said the second quarter would see further head-count reductions and it has trimmed capital spending plans 13% to $2.6 billion, while suspending its stock buy-back plan. Halliburton, the second largest oil field services provider, saw net income fall 35% to $378 million, compared with $580 million in the previous year’s first quarter. Revenue fell 3% to $3.91 billion from $4.03 billion in the previous year. The company cut 2,000 jobs in the first three months of the year. Following are excerpted highlights from the analyst conference calls in which the companies announced their results, courtesy of transcripts taken from the website Seeking Alpha. During the conference calls, company executives first made statements and then responded to questions. Halliburton, April 20, 2009 CEO Dave Lesar: “The industry experienced an unprecedented decline in activity in the first quarter which obviously had an impact on our financial results. The US rig count has dropped over 50% from its August 2008 peak and there can be no certainty when the decline in activity will bottom out…. “The international markets were more resilient than the domestic market. However, our business started to see the deferral of several projects in line with the behavior of past cycles…. “Despite a 30% year-over-year decline in North American rig activity and the impact of price degradation, our North American revenues declined on 10% year-over-year due to share increases in select locations and favorable service mix from shale plays…. “North American margins declined to 14% resulting from lower volumes and intense pricing pressures…. “North American revenues dropped 25% on a sequential basis on a 30% sequential decline in rig count. The largest declines came in the Permian Basin, the Rockies, and the mid-Continent…. “The timing of when national gas supply and demand fundamentals will improve is uncertain…. “We expected that 70-75% or our North American margin compression would come in the first quarter…. “Deep water provides our company with significant opportunities as customers value our unique technologies to increase productivity in these challenging reservoirs. We enjoy leading deep water positions on a global basis and (sic) cementing completions, stimulation and a number-two position in directional drilling, LWD, and drilling fluids…. “Certain international markets such as Russia and the North Sea are already exhibiting particular weakness in activity due to the lack of access to external financing to fund development projects…. “While it has been our desire to minimize headcount reductions during this down cycle we found it necessary to reduce personnel in the first quarter…. Executive vice president, strategy and corporate development, Tim Probert: “While the eventual depth of the North American cycle is uncertain it is worth noting that the sub-cycle of oil directed activity is exhibiting signs of a bottom. The international down cycle is underway with rig count falling by 9% from the September peak in 2008. Using past cycles as a guide there is a clear risk of a further decline in the international drilling market under current demand and commodity price scenarios. Generally, past international cycles demonstrate differences in amplitude and time frame compared to the US. International cycles tend to be shallower and longer in duration and follow US cycles by one or two quarters, much like we are experiencing now…. “Improving international project economics is a key driver for our customers and it is incumbent on us to participate in this effort which in some respects could lead to what could be characterized as a cost- inefficiency led recovery in the current price environment. To address the impact on margins we are focusing our efforts to lower our input costs across our global network. Of our total costs about 1/3 of personnel base and 2/3 are dependent on our supply chain management structure in one form or another…. “We have reduced our headcount in North America by 12% in the quarter. In response to analyst questions: Dave Lesar: “I think we are looking at potentially a 300-500 basis points additional pressure off the margins we saw in Q1…. Then I believe we will start to get some help in the back part of the year as we start to push through some of the cost savings…. “I think you are seeing a variety of behavior in the market place today. You have customers that are just flat shutting gas production until the pricing gets better. We have a subset of customers that are drilling but not completing wells. We have some customers that are drilling and completing and then shutting their production in…. “Pricing has collapsed ahead of our ability and the industry’s ability to sort of push cost through our supply chain to try and preserve the margin base…. [In the immediate future] I think we will be able to more closely match the revenue reduction opportunities with the cost and supply chain side of it. I don’t believe you are going to see as far as we can see at this point in time the sort of margin compression you are having in the US in the international market place…. “The industry is going to look quite a lot different, I think, when it recovers this time. I think we are going to certainly ensure that we place ourselves in a position where we take best advantage of the newer plays and structure ourselves to take advantage of a rising pricing environment.” Schlumberger, April 24, 2009 CFO Simon Ayat: “We are continuing to focus on managing our cost base. In this regard we have largely completed the headcount reduction we announced last quarter. In order to better match our costs to the lowered activity and pricing levels, we will likely have a further similar reduction over the coming months…. “Oilfield Services first quarter revenue fell by 13% sequentially while WesternGeco revenue dropped 8%.... “North American [margins] declined by 858 basis points to 13.7%, primarily due to the impact of rapid and deep reduction in US land and US Gulf of Mexico shelf activity coupled with heavy pricing pressure…. CEO Andrew Gould: “Recent economic forecasts have yet to show any positive trends in GDP stabilization or growth, with the major forecasting agencies lowering their demand expectations accordingly. Our visibility on 2009 has therefore not materially changed from the end of the fourth quarter. We do not see any significant recovery in North America gas drilling before 2010. Overseas, while activity declines will be limited our customers are actively seeking and obtaining price relief to improve the economics of current projects. At the same time, exploration expenditures are being deferred in favor of projects that product immediate cash flow. We are encouraged to see offshore deepwater activity resisting fairly well the current budget cuts.” In response to analyst questions: Andrew Gould: “Pockets of resistance today are more linked to the commitment to long-term projects that customers have taken which is more expensive for them to stop or slow than to continue…. “On large projects where not only the operator but also the service company has a considerable investment and in conducting smooth operations the tendency is for the operators to want to re-negotiate price rather than re-tender and disturb the whole operation…. “I think for the oil industry as a whole, service providers and our customers will be making a judgment in the third quarter. And that judgment will be very material to what our activity is likely to be in 2010 and that judgment will be made on the basis of how they see GDP progression at that point in time and what the oil price is at that point in time…. “I think that to repeat Q1’s performance will be extremely difficult…. “We think [headcount reductions] over the coming months will be an equivalent to the initial number which was 5,000…. “… I still think that given the nature of many of the projects that our customers want to undertake, even with cost reductions, $50 oil is going to be tough.... “Everyone is going to have a really rough time in the second quarter with North America margins just on the basis of very low activity. And actually I think that cost reduction will allow the industry, will allow us to stabilize North America margins but it’s going to take either removal of capacity or a fairly substantial increase in the rig count to move pricing power back the other way.”
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