• Jeff Matthews

Around The World in 80 Minutes

Oil service pioneer Schlumberger—for all the anti-French wisecracking that goes on these days (e.g. “France just raised its terror alert…from ‘Run’ to ‘Hide’”)—is one of the world-class acts of public companies, and has been almost since its founding back in 1912.

That’s right: in 1912—when armies still moved on horse-back—Conrad Schlumberger conceived of using electrical impulses to map rock formations below ground.

And this wasn’t some snooty France-only deal. Conrad and his brother began doing geophysical surveys in Romania, Serbia, Canada, the Union of South Africa, the then-Belgian Congo and the United States in 1923.

In fact, Schlumberger is probably the most international company I have ever come across in 25 years of doing this, and therefore one of the most interesting.

So a Schlumberger conference call is always worth a listen, if for nothing else than its ability to take you around-the-world-in-80-minutes.

But with the world in what feels like unusual flux, from Iraq to Russia to China to Venezuela and places in-between, the Schlumberger call takes on an especially value-added hue—and last week’s did not disappoint.

Rather than summarize the call in my “rambling and sarcastic” manner (thank you Business Week!), however, I am presenting here the most interesting, unvarnished dialogue from last week’s earnings call—with questions from Wall Street’s Finest and answers provided by ace Schlumberger Chairman and CEO Andrew Gould.

It needs no elaboration, although I have italicized the more potent comments. Q: In the quarter here, you’ve posted over 40% incremental margins both looking at it year-over-year and sequentially for the oilfield. Given all that you see right now, do you believe that those kind of incremental margins are sustainable and for how long?

A: Let me put it this way, Geoff. I think that we still have considerable pricing power. I also think that we’re starting to see considerable inflation in the system and it’s a question of which one is going to go faster.

Q: Can you elaborate a little bit on the inflation comment and where you see that?

A: Not only in materials but even more importantly we’re seeing it in the cost of labor now. Q: And are you taking any new actions in regards to labor in—where you’re getting labor from or anything else that—?

A: No, our problem is retention. Our problem is not getting it. Our problem is people poaching our labor.

So we have put certain retention mechanisms in place. We have had a general salary adjustment fairly recently, so you know, we have to get that back in pricing.

Q: I wonder….whether or not the slowing in oil demand growth in China is a concern to you or not?

A: The demand thing doesn’t worry me particularly, because you know, everyone is focusing on the IEA’s [International Energy Agency] demand remarks in the last week or two.

No one seems to have focused on the supplier, and what is really interesting is if you look at the supply numbers for the first half year, the non-OPEC supply is about 1.2 million barrels a day below what the IEA currently has in their forecasts.

So you know, I don’t think there is a significant elasticity being developed in supply demand for it to significantly affect the price.

Q: And a quick follow-up. Russian production growth has slowed dramatically.

A: Yes.

Q: Given that Schlumberger has more visibility into Russia than anybody, I was wondering if you could add some more color…?

A: We’ve always said that there are two factors playing. One is that we are moving towards the end of the period when it was easy to access the existing well stock that was drilled in the Soviet era, and to work that over and to produce more. Still possible—but a lot more difficult than it was three or four years ago.

And the second thing is…that people are reluctant to invest more.

Q: And Iraq? Any update…?

A: The last assessment was still that it was too dangerous for us to do anything.

Jeff Matthews I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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