Wednesday, January 28, 2009

earnings call, part II

So what was actually said on the earnings call? And what, if anything, did I learn? A lot and a lot.

For starters, currency matters. Great quote came about 18 minutes in when Gould (CEO) said, "Actually almost all our weakness this quarter in the North Sea came from the devaluation of the pound against the US dollar."

Over the several years when the US dollar was losing value against almost every currency, any company that did a majority of their business overseas but was traded in the States benefited greatly from the devaluation trend. Now that the US dollar has bounced back (though it's probably a dead cat bounce) those overseas profits aren't going to be quite so big. (My take on the valuation of the US dollar is essentially that if we're determined to print our way out of this financial train wreck, then those dollars you're holding are going to be worth less when it's all said and done. A lot less. But, if Europe also jumps on the printing press gravy train, then the loss of value in the USD might be a wash, at least relative to some currencies.)

Venezuela also came up again. I remember several quarters ago (Google crunching reveals it to be Q2 of 2007) when an analyst asked Gould to characterize the relationship that Schlumberger had with PDVSA (the state-owned national oil company in Venezuela). Suffice to say, Gould said that Schlumberger was 'happy' with the relationship. The relationship, regardless of its health, isn't something Gound could really comment on other than what he said. Even if it had been going badly, what would anyone expect to hear? Keep in mind that there was a fair bit of anti-US sentiment coming out of Chavez' mouth at that time. This time, Venezuela came up when someone mentioned a report that PDVSA's accounts payables had reached a total of $7.9 billion for their vendors. Gould expressed confidence in receiving payment from all the NOCs eventually (implicitly including PDVSA) albeit with probably generally longer terms. He cited a case back when he first started, "Since I’ve been in this business we’ve never not been paid by anyone. Well, never say never but when I first joined Schlumberger one of the NOC’s didn’t pay us [at first] and they paid us seven years later." Better late than never. Of course, this could always happen. Force majeure wins again.

The downturn in the economy has brought with it a dramatic decrease in the price of most commodities. Relevant to this discussion (other than oil which we'll get to) is steel. So much is made from steel. Rigs, pipe, other pipe, trucks, most metal things really. We don't do a lot with plastics. Raw price material decreases will help a great deal as long as they filter through the system and that will take upwards of a year.

It should come as no surprise that lower oil prices means fewer economical projects. This essentially means that almost all "new categories" of oil development are not commercial at current prices. Things like enhanced oil recovery, ultra-deep, heavy oil, tar sands, coal-to-liquids and gas-to-liquids are largely not worthwhile at this point. This will lead to a decrease in exploration and eventually a decrease in production. This will only be partially offset with the decrease in commodity prices. Some projects will be reassessed and deemed economical given lower raw material costs. However, new production will still be curtailed and existing production will decrease given natural decline rates.

All this means that the thesis that Gould has espoused since at least 2005 remains intact. That thesis is that the long-term era of cheap oil is over. While not explicitly stated during this call, the fundamentals don't really change even given the seemingly dark days immediately ahead. Lower prices mean fewer new projects which will eventually lead to lower production or at least more constrained existing production. The biggest variable is when demand will recover and the industry has very little say in that. There has been genuine demand destruction, not just plateauing, for most materials and it will take time to recover. Nonetheless, when it does the supply capacity will need to bounce back very quickly and we just might get another price spike. Maybe we'll get to do this all over again.

3 comments:

Anonymous said...

In the sixth paragraph, do you mean "coal-to-liquids"? Your loyal readers are all over these all-too-infrequent postings. No wiggle room from us!

Brian said...

Yes, it's been fixed.

Anonymous said...

Dead cat bounce? Ha! Let's see if Obama & Company has anything to say about that. You may not think much of the US recovery effort in a few months, but it will still shine brighter than the rest of the world, me thinks. Of course, "brighter" is a relative term.