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Anticipating a slowdown in the US oil patch, Schlumberger charts new course

Forecasting a significant contraction in North American oil and gas activity for 2020, Schlumberger Ltd. on Jan. 17 unveiled a 2020 strategy focused on expanding margins by shrinking its less profitable business lines.

Olivier Le Peuch, CEO of the world's largest oilfield services company, said the North American land market will contract for a second year as oil and gas producers focus on capital discipline. Schlumberger forecast a double-digit market correction.

Given its 2019 GAAP net loss of $10.1 billion, mainly due to North American land market weakness, Schlumberger will zero-in on returns, rather than growth in North America, executives said during their year-end earnings call.

"Our ambition for North America land in 2020 has been clearly reset for margin expansion despite the unfavorable activity outlook," Le Peuch said. "While our strategic decision will result in revenue reduction greater than the decline in the market, they will contribute incremental earnings and cash flow compared to 2019. This will allow further prioritization of resources and CapEx allocation towards the international market."

Specifically, Schlumberger plans "repurpose" its OneStim business, the most significant element of its North American portfolio. OneStim provides fracturing services, and through a self-imposed capacity cap, the company will reduce the total available capacity by 50%, and increase the number of dedicated frac fleets to more than 80% of the total, Le Peuch said.

While reducing its frack fleet, Le Peuch said the company remains open to new business opportunities in North America when situations improve. "While we believe this action improves OneStim performance, reshaping it for the better into a focused and profitable business line, we'll keep our options open and be ready to participate into an enhanced market consolidation offering, given the right partner and economics," the CEO said.

As the market continues to contract, Schlumberger will also exit its onshore coil tubing operations in North America. The company believes that market is commoditized and "offers neither a significant integration nor performance technology upside," Le Peuch said.

Also central to its plan, Schlumberger will accelerate its fit-for-basin strategy. The company will expand the asset-light model to other business lines to increase market reach while optimizing its infrastructure and capital expenditure requirements, the CEO said.

After cutting its workforce by more than 1,400 employees since the third quarter of 2019, Schlumberger will continue to reduce its facility footprint. It will shrink the areas in which it operates by an estimated 25% by the end of 2020, and adjust the support structure accordingly, Le Peuch said.

The CEO said that when completed, the facility and workforce reductions will save the company above $300 million on an annualized basis when compared to the third quarter of 2019 run rate.

International and offshore market performance in 2019 helped mitigate the negative impact from North American land. For 2020 Schlumberger expects exploration and production spending growth in global markets to support international market growth above the mid-single digits.

The company reported fourth-quarter 2019 net income of $545 million, or 39 cents per share, up from $498 million, or 36 cents per share, in the same period in 2018. The results beat the S&P Global Market Intelligence consensus estimate for the fourth quarter of 2019 of 37 cents per share.