Russia sanctions may squeeze oil services profits
Schlumberger, the world's largest oil field services company, said Tuesday that Western sanctions against Russia could affect its operations in the country and hurt its third-quarter profit.
The company joins two other Houston-based services companies in warning investors about possible profit hits related to the sanctions, which prevent them from giving Russian oil producers access to some types of high-tech drilling equipment.
"Up until now, most companies had been saying they're waiting to see what the impact is," said Joao Felix, Schlumberger's director of external communication. "Now we've looked ... and it's going to impact us."
Stepped-up sanctions against the country "are placing some restrictions on the engagement of certain people and equipment in our Russian operations, which in the short term will have an impact on operational efficiency and costs in Russia," the company said Tuesday in a news release and Securities and Exchange Commission filing.
Sanctions announced by the European Union in the past week build on previous measures by the United States, including some specifically targeting the energy sector. They're aimed at pressuring Russia over its annexation of Crimea and other interventions in Ukraine.
Schlumberger, with headquarters in Houston, Paris and the Hague, Netherlands, said the potential effect of the sanctions in the third quarter is "limited," about 3 cents in earnings per share.
That calculates to $39 million in potentially lost profit, based on the 1.3 billion in outstanding shares Schlumberger listed in its last SEC report.
"Schlumberger remains confident that we can support our clients in Russia without material disruption, and operations are therefore being adjusted as necessary in response to the U.S. and EU measures, while we continue to work closely with our Russian customers," the company said.
Just a few weeks ago, Schlumberger leaders didn't seem overly concerned about earlier sanctions against Russia.
During a July 18 call with analysts, CEO Paal Kibsgaard said sanctions hadn't affected Schlumberger in Russia at that point and it was "business as usual for us." He acknowledged then, however, that the situation could change.
Schlumberger was the second Houston-based services company this month to warn that the sanctions could hit the bottom line.
National Oilwell Varco, which had $100 million in sales to Russian customers in the first half of 2014, said in its quarterly SEC filing last week that "some or all such sales may be restricted in the future by these sanctions."
The company said it has a $140 million investment in Russia overall.
"The severity of delayed or lost future revenue and any possible impairment of our net investment will depend on the duration of the sanctions and other government actions," NOV wrote.
The head of a third services giant, Halliburton, voiced similar concerns in a conference call with analysts in July. CEO Dave Lesar said that escalating sanctions in Russia could affect the company's business in the second half of the year.
Marshall Adkins, an analyst at Raymond James & Associates, said it's difficult to gauge how sanctions will affect services companies without knowing how long they will last.
"Nobody really knows yet exactly how much is going to be shut down," Adkins said, adding that he thought Schlumberger "is trying to get ahead of this thing and recognize there will be an impact."
In the short term, at least, that impact won't be dramatic. U.S. officials have said they want to make it harder for Russia to pursue future projects.
Analysts say the measures won't cripple the country's energy sector in the short term because they don't apply to existing contracts.
"While these sanctions do not target or interfere with the current supply of energy from Russia or prevent Russian companies from selling oil and gas to any country, they make it difficult for Russia to develop long-term, technically challenging future projects," the U.S. Department of Commerce's Bureau of Industry and Security said in a statement two weeks ago announcing the latest sanctions.
The first round of U.S. sanctions against Russia earlier this year targeted specific individuals within Russia, and a subsequent round targeted certain companies. The latest sanctions target industries, including the energy sector.
The Commerce Department's ban applies to the export or transfer of technology that can help the Russian energy sector explore or produce oil from deep water, the Arctic offshore and shale.
Equipment subject to the sanctions includes drilling rigs, horizontal drilling and completion equipment, machines used in subsea processing, down-hole monitors and equipment, various types of drill pipe and casing, remotely operated vehicles and computer software used in conjunction with hydraulic fracturing.
"There's a lot of oil there, and the most efficient way of extracting oil is horizontal drilling, or what we call shale drilling, which is in every type of formation," said Adkins, the Raymond James analyst. "The solution to it is the technologies we've developed in the U.S."
A Raymond James analysis sent to investors last week says that Russia represents a small but significant portion of oil field servicers' business, accounting for an estimated 3.6 percent to 5.1 percent of the profits of Baker Hughes, Halliburton, Schlumberger and Weatherford. The companies don't break down their earnings by country.
Russia is likely to remain an attractive and growing market for U.S. oil field services companies, despite the political complexities, said Rob Desai, an analyst with Edward Jones.
Because of Russia's size and variety of challenging terrain, oil field services providers can charge premiums that raise their profit margins there, Desai said.
"It's an area that's growing faster and is definitely more profitable," Desai said. "I think if the sanctions last a long time, it will have a material impact, but I don't think it will last for long. One of the sides will have to cave at one point."