Oilfield services major Schlumberger Ltd. accelerated its restructuring plan and ended the second quarter with results that beat expectations, a strategy the company plans to continue through the end of the year.
Executives on the company's July 24 earnings call pointed to additional cost-saving efforts through the end of 2020 positioning the company for growth in a structurally smaller market with technology as a primary driver of earnings.
The industry bellwether and behemoth recorded a $3.7 billion charge in the second quarter resulting from the "transformative" restructuring plan designed to increase capital and resource efficiency, CEO Olivier Le Peuch said.
About $1 billion of the charges were for severance associated with reducing the company's workforce by more than 21,000, according to an earnings report released ahead of the call. The company plans to pay the majority of the severance charges during the second half.
Schlumberger aims to permanently removing $1.5 billion of structural costs annually, more than half of which are related to its international businesses, with 40% of the total cost-reduction targets already achieved. The majority of the remaining cuts will come by year-end, CFO Stephane Biguet said during the earnings call.
Schlumberger is reorganizing into a leaner and more responsive company, better aligned with customer workflows, Le Peuch said in the earnings release. "We are combining our 17 product lines into four divisions, structuring our geographic organization around five key basins of activity, and streamlining our management structure," Le Peuch said. Additionally, Schlumberger is making significant progress in adopting digital technology.
The restructuring decisions fit the industry that is transitioning to a new normal, the CEO said. The market for the foreseeable short-term will be structurally smaller. "So I think we have to make that realization, whether we call it 25%, 30%, 35% smaller in size, it depends on the region and the business, but I think that's a reality that [is] leading us," Le Peuch said on the call.
These restructuring efforts will "provide a strong tailwind to our margins in the second half of the year and into 2021, Biguet said.
Le Peuch agreed. "Cash flow performance in the coming quarter will continue to benefit from the tailwind of our aggressive capital spend adjustment, focused on working capital efficiency and incremental cash savings from our restructuring program. Our ambition in the second half remains positive free cash flow despite anticipated severance payments."
"[Schlumberger's] hefty cost reduction efforts drove much healthier than anticipated (adjusted) earnings results [versus] expectations [in the second quarter]," Tudor Pickering Holt & Co. analysts said in a July 24 note.
Internationally, the impact of the cost-cutting actions, combined with its capital structure program and continued industry adoption of new technology, supported sequentially flat margins in the second quarter. Meanwhile, the accelerated restructuring in North America land operations to a scale-to-fit and asset-light business model permanently reduced fixed and infrastructure costs. The company shut about 150 of its facilities while making progress on its technology access franchise, Le Peuch said.
Schlumberger reported net income of $69 million, or 5 cents per share, for the second quarter, down from $492 million, or 35 cents per share, in the same period of 2019 but better than the S&P Global Market Intelligence consensus normalized EPS estimate for the second quarter of a loss of 1 cent. Free cash flow was positive at $465 million, or 8.7% of revenue.