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Commentary

Schlumberger Preparing for Downturn

The oil-services firm showed strength in the fourth quarter, but management is preparing to cut costs to ride out weakening market conditions, writes Morningstar’s Jason Stevens.

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 Schlumberger's (SLB) fourth-quarter results showed few signs of the oil price collapse, but it's evident from its actions and comments that the firm is preparing for the downturn. Layoffs of 9,000, or 7% of the workforce, will help the firm reduce costs as revenue comes under pressure in 2015. Given oil prices below $50 a barrel, we continue to expect at least a 20% reduction in global upstream spending this year, with higher cuts in the United States likely. Schlumberger is also dialing back its own capital spending by 25% to $3 billion, a level that we believe will sustain innovation and help preserve returns on invested capital through the downturn.

Our current expectations call for a 15% decline in oil services revenue in 2015 and a 14% reduction in Schlumberger's 2015 revenue to $42 billion. We contend, however, that Schlumberger's industry-leading technology will remain attractive to upstream producers seeking to reduce costs and focus on boosting operating efficiencies. We model 600 basis points of operating margin compression, mirroring the 730-basis-point compression Schlumberger realized in the 2009 downturn. However, we acknowledge that today's Schlumberger is a different beast than in the past, and on Friday's earnings call CEO Paal Kibsgaard was clear that he expects better results during the current downcycle. 

Jason Stevens does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.