Schlumberger Preparing for 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.

Schlumberger is now focusing on aligning costs, activity, and staffing to industry activity levels on a quarter-by-quarter basis, implying that the 9,000 head count reduction may just be a starting point if market conditions weaken further. During the call, Kibsgaard also stressed conversations with both customers and suppliers focused on reducing the cost of delivering services. We believe the firm will focus on products and technologies that drive efficiencies for its customers but command premium pricing through this downturn, a move that will help support its industry-leading returns and wide moat rating.

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