Schlumberger sees energy security as basic driver of greater H2 2022 activity
Schlumberger sees “very robust” oil and gas drilling activity in second-half 2022, underpinned by the need for energy security and “urgency” to provide more varied and reliable oil and gas supply sources, the global oilfield services provider’s top executive said July 22.
Stepped-up activity in the back half of 2022 will likely be marked by acceleration of investments in basins outside North America and continued strengthening of offshore activity as operators, including international oil companies, increase spending, Schlumberger CEO Olivier Le Peuch said during the company’s Q2 earnings conference call.
“The energy security situation continues to drive structural activity increase, resulting from the increased focus on short-term production and mid- to- long-term capacity expansion across oil and gas plays,” Le Peuch said.
“In addition, we also expect further exploration and appraisal activity and the pricing dynamics experience so far to add further support to both the growth trajectory and … margins performance during the second half” of 2022, he said. “These positive undercurrents will lead to an attractive mix and an increase in short- and long-cycle international projects, complementing already robust short-cycle activity in North America.”
Le Peuch’s view on exploration drilling appears more positive than some in industry who predict that longer-cycle offshore projects that often take many years to develop and produce hydrocarbons, are likely to diminish in future as E&P companies choose to conserve capital for investments that have a more immediate payback, and as the energy transition proceeds.
Bullish on offshore
But offshore is typically known for its so-called “elephant” or jumbo-sized finds of both oil and natural gas. And, offshore drillers in recent quarters have painted a more enthusiastic picture of offshore since costs have dramatically declined for those projects due to more innovative ways of managing and building them.
As a result, Jeremy Thigpen, CEO of Transocean, said in the deepwater driller’s first-quarter call in May that roughly 80% of offshore projects are profitable at $60/b, at a time when oil prices are around $100/b. “Numerous” customers claim a breakeven oil price for their respective projects of “well below” $40/b, Thigpen said.
Mounting offshore activity has been particularly positive for Schlumberger which is an industry leader in those arenas. “The rise of offshore activity, particularly deepwater, was a key driver for our second-quarter revenue growth,” Le Peuch said.
As Le Peuch’s peer Jeff Miller, CEO of Halliburton, noted earlier in the week during oil services provider’s Q2 call, oil supplies and spare capacity remain tight and that will bodes positive for crude prices, according to demand outlooks from both OPEC and the International Energy Agency.
And that continues to suggest a “call on supply from North America and a more significant call on supply from the international basins,” Le Peuch said.
Supply ‘urgency’ supports more capex
Moreover, even though near-term worries of a looming economic slowdown are surfacing, “the urgency to grow long-term oil and gas production capacity will continue to support strong upstream E&P spending growth,” he said, also echoing remarks by Halliburton’s Miller.
Capex increases this year versus 2021 should be in the neighborhood of around 22% globally, with about 33% from North America and 18% collectively from international regions, according to the Evercore ISI’s annual Global E&P Mid-Year Spending Outlook, released in early July. The survey indicates that much of the increase will be devoted to covering a projected inflation rate of 15% to 20% in 2022 versus last year.
As a result, “we are witnessing a decoupling of upstream spending from potential near-term demand volatility, resulting in resilient global oil and gas activity growth in 2022 and beyond,” Le Peuch said.
Also, the trends supporting pricing tailwinds – such as tightening service and equipment capacity in land and increasingly, internationally – “will continue to represent a defining characteristic of this upcycle and will support both revenue growth and margin expansion, more than offsetting inflation,” he said.
In addition, another feature of the quarter was broadening pricing improvement, impacting all divisions, geographies and operating environment, Le Peuch said.
Evercore’s twice-yearly survey, which its researchers have conducted for more than 30 years, polls more than 250 oil and gas companies on upstream spending trends.
Schlumberger’s Q2 revenues totaled $6.7 billion, up 14% sequentially and 20% year on year. Of Q2 revenues, those from North America totaled $1.54 billion and international, $5.19 billion.
Net income in Q2 was $959 million (67 cents/share) versus $510 million (36 cents/share) three months earlier.
Le Peuch called the company’s Q2 performance a “significant inflection point” and said the quarter represented “the largest sequential quarterly growth since 2010.”