This week we continue our discussion of Q3 earnings and what the execs had to say. I once again took some relief in the reports we are getting. All of these transcripts are available in full at www.seekingalpha.com. I try to provide you the highlights: the bold italics are the parts I found most interesting.
On October 20, 2016, FMC Technologies reported Q3 earnings. FMC reported revenue of $1.1 billion, and adjusted EPS of $0.35. This was better than anticipated, yet revenue was missed by -$50M.
Key points from the earnings conference call were as follows:
- Turning to orders, total company inbound orders for the quarter were $692 million, including $401 million in subsea technologies. Subsea orders showed improvement over the first half order run rate driven by an increase in equipment orders, a trend we expect to continue in the fourth quarter.
- In the near term, we have further confidence small equipment orders will improve in the coming quarters. Activity remains centered around two key themes, subsea tiebacks and subsea boosting as enablers to move incremental barrels through existing facilities in a timely and capital efficient manner. The slow pace of project sanctioning has put increased operator focus on production levels beyond 2017. Operators can leverage existing infrastructure with short cycle subsea tiebacks making smaller investments in fields that do not require an additional host facility. The use of standardized equipment for a fully integrated offering can provide further economic benefit by significantly accelerating time to first oil.
- Operators are looking for real structural change in project economics and we are seeing this happen today across many deep water cost inputs. Our customers are taking aggressive internal actions to lower their own cost and we continue to improve project economics through standardization, technology innovation and integrated business models. These actions are generating significant tangible savings that will move some larger projects forward, giving us great confidence that 2016 will likely mark the trough in orders for the current cycle.
- Regarding 2017, we would expect additional projects. That is obviously a function of all the things I said earlier in terms of our customers, areas of focus and strengthening their balance sheets, protecting their dividends, but also looking for projects, real projects with real, tangible savings that they can move forward. So we would expect some additional projects to convert in 2017 as well.
- Currently, FMC has tenders out on 8 subsea projects that are in the active stage of negotiations. This compares to 0 projects a year ago.
- FMC hopes that some of the bigger projects will come in during the first half of 2017, but anticipates it will probably be the second half.
On October 26, 2016, Weatherford reported Q3 earnings. Weatherford had revenues of $1.36B, and earnings per share of -$0.39. Weatherford missed revenue by -$80M and earnings by -$0.14 per share. Key points from the earnings call were as follows:
- On last quarter's call, we highlighted the challenges in the off-shore market arena. Today three months, later the industry conditions we face have not changed and we expect to see more of the same for the foreseeable future. The leading indicator for deepwater activity, contracted floating rigs declined as the rate of rigs being idled either by contract termination or exploration continues un-abated..
- North America revenue increased 12% sequentially versus an average U.S. rig count increase of 14%. Canada resurfaced after the spring break-up benefiting completions, artificial lift and well construction. Operating income margins improved by 394 basis points but are still way down by poor pricing levels and remain negative.
- On the cost side, we have completed the head count reduction plan of 8,000, generating annualized savings of $504 million. Also, we ceased operations in three manufacturing facilities during the quarter bringing the year-to-date total to 10, which is in excess of the nine plant closures for the year.
- Finally, we closed five operating facilities, mainly in the United States, for a total of 59 for the year. Given the current market context and the anticipated increase in activity levels, we have chosen to preserve capability to address the upcoming growth.
- Moving on to the near-term outlook now, we expect continued robust recovery and activity levels in both the U.S. and in Canada with growth in rig count on land. The growth will be driven by both completions and artificial lift, which are expected to improve sequentially with customers aggressively working through the DUC, which is the drilled but uncompleted inventory of wells. Additionally, we expect to put two more pressure pumping fleets to work, bringing the total number of active crews to nine by year-end.
- There are industry-wide signs of slowly tightening capacity. While year-end holidays and seasonal factors will weigh on the results, we expect to grow both revenue and margins in North America. Internationally, we expect to see continued modest growth in Latin America, a reasonable growth in the Europe, Caspian, Russia, sub-Sahara Africa region, with growth in the North Sea based on recent contract awards and the deployment of an offshore MPD package on a Deepwater rig coupled with a bottomed out but stable sub-Sahara Africa, which more than offsets a seasonal slowdown in Russia.
- Looking back at our regional results, in NAM Q3 can be marked as the first sign of a turnaround. By mid-August client inquiries were substantially increased. September was materially stronger. We are in recovery mode for now. In Latin America, we expected Q3 to be further challenged; Q3 actually improved over Q2 driven by cost cuts, but mostly by early gains primarily in Mexico and Colombia. We are changing our prognosis based on all we see. We are in early recovery mode in enough parts of Latin America that it should carry the whole region. Latin America will recover initially more slowly than NAM, but is nonetheless the beginning of a recovery.
- The synthesis is the same for all regions. Q3 marked the end of the decline for all regions. We're in recovery mode, different spending on region and product lines, but recovery nonetheless. And to be completely clear, both NAM and international are in recovery mode. From this point forward, we should expect improvements in profitability, improvements in margins on the back of a very lean cost structure and a fairly improved operating bench and leadership.
- Now, demand will come with drilling activity, but they're already developing pockets of equipment shortages.
- If oil does no more than hold at $60 throughout 2017, we would have further activity gains and improve financial performance, on the back of an extremely lean cost structure, and much improved operating base and leadership. This is what we believe. Now will oil stabilize and oil rise further? We have views like everybody else, but rather than make personal commentary, which is probably not worth very much, I will state a recent quote from Saudi's Energy Minister to sum up our conclusion from a far more authoritative source. Read the quote; it's not long.
- The beginning of the quote: Rapid OPEC production growth has reversed with major cuts in upstream investments and the steepening of decline rates. With our investment that trend is likely to accelerate to the point that some analysts are now sounding warning bells of future supply shortfalls, and I am in that camp.
On October 28, 2016, Oceaneering reported earnings. Oceaneering had revenue of $549.3M (missed expectations by -$49.2M) and earnings per share of $0.17. The following key points were made during the conference call:
- Now turning your attention to our outlook, we are expecting that our fourth quarter would be considerably lower than our adjusted third quarter results due a continuation of weak demand for our services and products exacerbated by seasonality. We expect sequentially lower operating results from each of our oilfield business segments, and slightly improved results from our non-oilfield segment, Advanced Technologies.
- We expect to see declining demand for drill support as 17 of the 91 rigs with Oceaneering ROVs onboard at the end of September have contract terms expiring during the fourth quarter and the future work prospects for all rigs with expiring contracts remains questionable. It is noteworthy to observe that the contracted floating rig count has declined 27% year-over-year and is down 41% from December 31, 2014.
- Now, I would like to share with you our view of 2017. Based on the number of floating rigs currently working, and our expectation for continued low levels of off shore activities, we believe 2017 will be a more challenging year for our operating results. Our outlook for 2017 could be characterized as marginally profitable with the operating income level on a consolidated basis. We expect the largest decline in profitability year-over-year through current Subsea Products and ROV.
- Nevertheless, we continue to believe that longer term deepwater will play a critical role in the global oil supply growth required to replace depletion and meet projected demand. Our belief is based in part upon discussions with our major clients. They continue to reassure us that offshore oil and gas is a meaningful component of their portfolios. We were told that reaching efficiency gains, standardization efforts and cost deflation are making offshore opportunities competitive with shale and conventional plays.
On No Weir reported earnings. Key points from the conference call were as follows:
- Let me turn to Oil & Gas. WTI has stabilized at around $50 per barrel with the average U.S. land rig count increasing by 16% during the third quarter. In North America, conditions continue to be very tough with frac fleet utilization bottoming at 26%, but there was a pickup in activity in September, and some of our larger customers began to refurbish previously stacked equipment. There was also an easing in cannibalization and destocking, although this is an ongoing issue for much of the market. The number of drilled, but uncompleted wells, or DUCs, has also started to fall slightly. And assuming oil prices stay around $50, there are signs of customers planning to complete more of these wells in 2017, and alongside the increased rig count, this has driven the refurb market.
- In contrast to North America, international market has become increasingly challenging with customers continuing to reduce activity levels and postpone maintenance where possible. As an example, some customers are now refurbishing or replacing equipment on breakdown, rather than following normal preventing maintenance schedules. Competitive pressure increased in the Middle-East as a result with orders of margin slightly down on prior expectations, although the business remains profitable in the period. Combined with our North American operations, this meant that the division as a whole remained loss making in the third quarter.
- Looking forward, assuming the North American rig count continues to recover slowly, a further modest pickup in pressure pumping and pressure control activity is expected in the fourth quarter albeit impacted by ongoing pricing pressure. International markets are expected to continue at current low levels throughout out the rest of 2016, affecting trading in the Middle-East. So, divisional profitability is now expected to reach breakeven levels in the fourth quarter with a small operating loss now expected for the full year. The division will remain cash generative throughout second half.
- North American upstream, the Oil & Gas division's largest market saw a sequential improvement beside customers are preparing to increase activity in 2017, assuming a sustained oil price recovery.
By: Ty Chapman
Five Star Metals, Inc.
Raising the Bar for Customer Service and Quality
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