After the earnings surprise posted by Halliburton earlier this week, the market was expecting an exceptional performance from its closest rival, Schlumberger Limited, that was slated to report its third quarter financial results yesterday. But, to the market’s disappointment, the world’s largest oilfield services company posted a large decline in its top line as well as profits compared to the last year [1], despite the increased global rig count in the quarter. While the company exceeded the earnings estimate by recording a strong improvement in its adjusted profits on a sequential basis, the market did not seem too pleased with the company’s results.
As a consequence, the oilfield contractor saw a marginal drop in its stock, despite posting an adjusted profit of 25 cents per share in the quarter, as opposed to Halliburton, whose stock grew more than 4% post the results released, even though the company reported a profit of just 1 cent per share. Thus, we believe that the market overreacted to Schlumberger’s 3Q’16 performance, largely because of the optimistic precedence set by Halliburton’s earnings.
Source: Google Finance
Interestingly, Schlumberger has always released its quarterly financials before Halliburton in the past. However, Schlumberger changed its release dates last quarter, and now reports its numbers right after its biggest competitor’s release. This strategy worked for Schlumberger in the June quarter when its rival did not perform well, and the company reported a better performance, causing a rise in its stock price. However, in this quarter, Halliburton posted a small profit of $6 million, against analyst forecast of a loss of around $60 million (Read: Halliburton’s Positive 3Q’16 Results Bring Hope For The Oilfield Services Industry). This reassured the market that the oilfield services industry is progressing towards a recovery, and led to higher expectations for Schlumberger’s 3Q’16 results, since the company has been much more resilient compared to Halliburton in this commodity slump.
At the first look, it appears that the company had a disappointing quarter, despite the uptick in the global rig count in the last few months. However, on a closer look, one can see that the oilfield giant did show a notable improvement in the quarter. Excluding the impact of the Cameron deal, Schlumberger’s 3Q’16 revenue increased 1% sequentially, driven by higher drilling activity in the North America and Middle East region.
Further, the Houston-based company reduced its operating cost by around $600 million in the quarter due to the steady progress of its transformation program, streamlining of global support structure, and early efforts in high-grading its contract portfolio. These cost savings trickled down to the company’s bottom line, enabling it to generate operating profit of almost $350 million in this quarter, against an operating loss of about $2.4 billion in the previous quarter.
This is a remarkable improvement for a company in the current challenging price environment, and more so when compared to its counterparts in the industry. For instance, Schlumberger has posted positive operating income in five out of the last seven quarters, while Halliburton barely managed to break even in this quarter after recording heavy losses in the same duration. Yet, the market chose to penalize the former, and reward the latter.
Apart from this, Schlumberger has continued to return value to its shareholders, even in the times when a majority of the oil and gas companies have either suspended their dividends, or have filed for bankruptcy. The company has, on the contrary, increased its dividend payments compared to last year, displaying the company’s commitment to its shareholder interests. In addition, unlike its peers, the company continues to buy back its own stock, based on the appropriate opportunity, to create value for its investors. However, these effort on the part of the company have also been neglected by the investors.
Nonetheless, we believe that Schlumberger reported a strong set of 3Q’16 numbers, with a stark improvement in its profitability. Although the company foresees weak drilling demand in the December quarter due to the holiday and maintenance shutdowns, it expects to see increased activity in onshore North American, Middle Eastern, and Russian markets in 2017. Thus, while the oilfield service provider will continue to feel the heat in the coming quarter, we anticipate a sharp recovery in the company’s performance in 2017.
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