Schlumberger’s $10.1B loss may signal trouble for Houston
With oil field services giant cutting 1,400 jobs, more industry layoffs could jolt local economy
The troubled U.S. shale industry is not out of the woods — signaling potential trouble ahead for Houston’s economy.
Schlumberger, the largest oil field services company, said Friday it lost $10.1 billion in 2019, laid off 1,400 workers in the fourth quarter, closed facilities, pulled hydraulic fracturing fleets from the field and plans to sell assets.
Experts say Schlumberger’s showing sets low expectations for other energy companies preparing to report year-end results and signals that they haven’t adapted to oil prices in the range of $50 to $60 a barrel — too low for many to break even.
For the Houston region, which is home to the Paris company’s principal offices, further industry layoffs and spending cuts could put a damper on the local economy. The energy industry’s struggles have already led the Federal Reserve Bank of Dallas to dramatically revise the region’s job growth in the second quarter of 2019 from a robust 4 percent to just a half-percent. More downward revisions are likely.
For Schlumberger, the ongoing shale slump resulted in a 10 percent decline in North American revenue in 2019, even as the company saw 8 percent growth internationally.
“These macro-conditions will continue,” Schlumberger CEO Olivier Le Peuch said during a Friday morning call with investors.
Schlumberger is not alone in feeling the pain as the slowdown in the U.S. shale fields continues. Other oil field service companies are responding by idling equipment and laying off employees. Its Houston competitors Halliburton, National Oilwell Varco and Pumpco Energy Services and the Houston oil field equipment-maker Stewart and Stevenson laid off more than 1,000 employees in November and December.
Leaked emails in early January revealed that Houston oil company Occidental Petroleum plans to implement “broad layoffs” in response to its $38 billion acquisition of Anadarko Petroleum. Days later, Houston oil company Apache Corp., oil field services company Enterprise Offshore Drilling and oil equipment-maker Valerus Field Solutions reported that they were cutting a combined 600 jobs.
Schlumberger’s 2019 loss follows a $2.2 billion profit in 2018. In the fourth quarter alone, the company’s profit dipped 33 percent, falling to $333 million from $498 million in the previous year while revenue remained steady at $8.2 billion.
On top of weaker demand for hydraulic fracturing services, Schlumberger’s yearend earnings were hammered by a $11.4 billion thirdquarter loss mostly attributed to writing down the value of two past acquisitions.
With shale industry conditions not expected to improve in 2020, the company isn’t sitting idle.
Executives have rolled out a plan to respond to the shale downturn. The company plans to sell its coil tubing business in North America and is shopping its rod lift business. It already has idled nearly one-third of its hydraulic fracturing fleet, closed a fourth of its North American locations and laid off 1,400 employees in the fourth quarter.
Describing the activities as “right-sizing” the company’s footprint, Le Peuch said the cuts will save the company more than $300 million per year. Going forward, Schlumberger plans to emphasize higher-margin digital technologies and focus on key customers in the three top U.S. shale basins.
“Our ambition for North America land in 2020 has been clearly set for margin expansion despite the unfavorable activity outlook,” Le
Peuch said. “While our strategic decision will result in revenue reduction greater than the decline of the market, they will contribute incremental earnings and cash flow compared to 2019.”
Schlumberger’s plans for reversing its fortunes in 2020 are getting nods of approval from investors. James West, research director for the New York investment banking advisory firm Evercore ISI, said playing up digital technology and capturing growth in offshore and international markets is a “back to the basics” move for the oil field services giant.
Looking at the company’s shale playbook, West said Schlumberger’s wider deployment of the the company’s “fit-for-basin” strategy will allow the company to franchise technology and digital services to local partners.
“Schlumberger is molding itself to work ‘smarter’ and not ‘harder,’ in our view,” West said.
In a research note, Bill Herbert with Houston investment bank Simmons Energy wrote that when added to previous cuts, Schlumberger’s decision to pull more frac fleets from the field represents cutting its available hydraulic fracturing capacity by half.
The good news on that, Herbert wrote, is that 80 percent of the fleets that remain will be dedicated to regular customers — reducing the company’s exposure to the volatile spot market for hydraulic fracturing services.
“Our intention is not to cold stack, warm stack and bring back,” Le Peuch said about the issue during the investors call. “Our intention is to right-size the capacity, which we need; restructure the organization, which we are doing; and refocus on where we believe that we have the best alignment with our customers and where we have the best leverage for our technology. We don’t intend to bring back capacity going forward.”
Looking at the business models and financial performance of 70 oil field service companies around the world, analysts with global consulting firm Deloitte have released a recent report that companies in the sector need to dump noncore business lines, improve margins on core products and services and embrace digital technology among the ways to improve earnings.
“This is not expected to be an easy lift,” wrote report co-author Duane Dickson. “Many oil field service companies rely on the same business models that worked for $100 plus per barrel of oil, which are stifling innovation and efficiency today.”
Shares of Schlumberger rallied Friday morning but settled at $38.37, down 1.6 percent on the day.