Oilfield services companies have been hit especially hard as oil producers cut back output with the coronavirus pandemic continuing to eat into demand and supplies far outstripping need. The world's biggest public oilfield services company is no exception.
Schlumberger Ltd. is approaching the challenge of preserving its balance sheet through the downturn proactively, taking a series of steps to shrink operations to better fit the evolving market, executives said on a first-quarter earnings call.
However, the second quarter could be "the most uncertain and disruptive quarter that the industry has ever seen," Schlumberger CEO Olivier Le Peuch said April 17.
Le Peuch said the first quarter was initially marked by "the usual combination of seasonal impact in the Northern Hemisphere and the sequential decline of product and software sales." Later in the quarter, however, activity declined in several basins due to the "unprecedented drop in oil price and the increasing challenge posed by COVID-19."
Under the deteriorated market conditions, management decided to cut its quarterly dividend by 75%, a move CFO Stephane Biguet said was the company's "most important decision of the quarter."
"The revised dividend still supports our shareholder value proposition by maintaining both a healthy yield and a reasonable payout ratio as we navigate these uncertain times. It also allows for prudent organic investment while maintaining the self-discipline required under the capital stewardship program that we have committed to," Biguet said. It also gives the company the flexibility to adjust its capital return policy either through increased dividends or stock buybacks when operating and business conditions improve, the CFO said.
"This is a monumental decision from the management team and exactly the right one," Bernstein analyst Nicholas Green said April 17. Green gave Schlumberger stock a "conditional buy" rating, predicated on its move to cut the dividend. "Removing 75% of the $2.7 billion cash obligation should permit rapid deleveraging of the balance sheet," the analyst said.
Mostly resolving Bernstein's conditional buy-case on the stock, Bernstein is now encouraging investors to buy Schlumberger stock at a "suitable entry point," Green said.
The company took additional steps to protect its balance sheet, addressing North America as the region took the brunt of the impact from the market slowdown.
Consolidated revenue of $2.3 billion was 7% lower sequentially due to customer spending cuts and a decline in drilling activity as oil prices slipped, the CFO said.
To protect margins, the company stacked frack fleets, reduced capacity by more than 27% and reduced capex plans by 60% by the end of the quarter, the CEO said.
Schlumberger also reduced its workforce in North America by nearly 1,500 during the quarter, implemented furloughs in both North America and internationally, and reduced compensation for the executive team and board of directors.
Le Peuch did not offer much guidance for the second quarter. "It is very difficult to model or predict the frequency or magnitude of the COVID-19 disruption on field operations," he said.
The CEO said market conditions may drive further adjustments in the second half of the year, including "final rounding in North America" as well as additional modifications in international markets.
Adjusting to market conditions, the company cut full-year total capital spending by nearly 35% from 2019 levels to about $1.8 billion, Biguet said.
The oilfield services major reported first-quarter net income of $351 million, or 25 cents per share, down from $421 million, or 30 cents per share, in the year-ago period, which beat the S&P Global Market Intelligence consensus normalized EPS estimate for the first quarter of 24 cents.
Through the struggles, the company generated $784 million of cash flow from operations, more than double what it generated during the same quarter in 2019.