The Covid-19 crisis has shaken-up nearly every company in the oil & gas industry with many opting for re-structuring. Oil majors including Exxon, Chevron, BP, and Royal Dutch Shell have revised their long-term benchmark price outlook and incurred sizable impairment charges. After the recent rally, further upside in oil prices depend on the revival of transportation demand and OPEC’s decision to continue with production cuts in 2021. However, lower drilling and completion activity is likely to weigh on Schlumberger (NYSE: SLB) in the near-term. As oil, coal, and natural gas account for 32%, 27%, and 22% of the global energy consumption, respectively, oil is likely to remain the leading energy source in the post-Covid world. Thus, the company’s diversified global presence and a strong cash position are expected to support a long road to recovery from current levels. Trefis highlights the key drivers of Schlumberger’s stock performance in an interactive dashboard analysis Why SLB Stock Moved -66%?
Diversified global presence to assist Schlumberger post-crisis
For the first nine months, SLB’s revenues plummeted by 26% (y-o-y) to $18 billion, but it reported positive operating cash flow as the $10 billion of net loss was primarily due to $12.5 billion of impairment charges. The company also divested its North American production business (which generates $3.2 billion in annual revenues) to Liberty Oilfield in exchange for 37% equity interest in the combined company. In 2019, North America, Latin America, Europe & Africa, and the Middle East & Asia contributed 33%, 13%, 24%, and 30% of the total revenues, respectively. Thus, the company’s presence in the Middle East and Europe is expected to drive the stock recovery with the easing of OPEC’s mandatory curtailments next year.
The company ended the third quarter with $3.8 billion of cash on hand. As direct cost of sales and services account for 65% of the company’s total expenses, stringent cost curtailment measures during times of crisis enable cash preservation. Currently, Schlumberger has trimmed its workforce, reduced the dividend by 75%, and slashed capex by 45% for the full year 2020. Considering the company’s fairly variable bottom line and cost control measures, we expect it to sail through the crisis without a substantial increase in long-term obligations.
Broader Oil Industry Outlook
After initiating mandatory production cuts in May, the OPEC+ is targeting a mere 0.5 mb/d increase in January 2021. To ensure price stability and monitor uneven demand trends, the OPEC+ will revisit production targets on a monthly basis. Thus, compliance amongst OPEC+ members is key to oil price stability in 2021. Per OPEC’s November release, the third quarter production stood at 23.8 mb/d, around 7.5 mb/d below the level observed in 2018 (fairly within the targeted range). On the other hand, the U.S. commercial crude oil and petroleum product inventories (excluding SPR) declined by 5% from 1,420 million barrels in October to 1,354 million barrels in November. The EIA expects fourth quarter crude oil inventories to average at 1,326 million barrels – indicating a substantial drop in December. Thus, the Brent price is expected to remain under $49/bbl in 2021 – nearly $6 higher than earlier estimates.
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