Schlumberger: Remain Invested Despite the Oil Slump

Schlumberger (SLB) shares have remained resilient to the oil slump this year. The oilfield services company has lost less than 3% of its value on the stock market this year, which is not surprising as it has turned in decent performances despite a weak end market.

Positive signs

For instance, when Schlumberger reported its second-quarter results, it beat estimates on both top and bottom lines. In fact, Schlumberger's revenue was down 25% year-over-year last quarter due to the oil slump, but the company is optimistic about a turnaround in the future.

This is because the company sees an expected uptick in the rig count going forward as oil and gas producers will ramp up drilling and completion of wells in the second half of 2015.

Moreover, to improve its efficiency, Schlumberger is focusing on new virtual technologies that can bring cost savings to the organization. This technology uses a variety of strategies ranging from evaluation, drilling, stimulation, and completions of wells. The fact that Schlumberger has expertise in both scientific understanding and carries an in-depth knowledge of its complete technology offering will help it design the best solution for each reservoir and each well.

These efforts on Schlumberger's part will help its customers improve their production profile at lower costs, thereby helping them sustain their margins at a time when oil prices are declining.

Also, in a bid to streamline its expenses, Schlumberger had cut 9,000 jobs at the beginning of the year. Additionally, the company has decided to cut another 11,000 jobs, bringing the total layoff count to 20,000 employees. Though this is a difficult step, but it should help Schlumberger right-size its operations in the current oil pricing environment.

What the experts say?

Additionally, Morgan Stanley analysts are also positive about Schlumberger's prospects. The investment bank cites that the company has strong margin resiliency, along with robust future cash flow potential, which is an indication of a strong organizational structure and better operational efficiency. According to a Benzinga report:

"Analysts at Morgan Stanley highlight that (1) the company's margin resiliency can be seen as a "true sign of its superior organizational structure;" (2) "Lower capital intensity and surprisingly strong FCF [are] further signs of operational excellence;" (3) a deep pocketed company offers to fund "cash-strapped E&Ps;" (4) the macro outlook remains quite constructive, but the recovery in services is expected to be slow."

Valuation and takeaway

Schlumberger's initiatives to combat the oil slumplook impressive. The company's use of technology in its operations will allow customers to reduce costs, which is vital in a low oil price environment. Additionally, the company's favorable valuation is another reason why investors should consider this stock for the long run.

Schlumberger has a trailing P/E of 25, while its forward P/E stands at 21.7, indicating that an improvement in its earnings is expected going forward. In fact, as per Yahoo! Finance, Schlumberger's bottom line is anticipated to grow at a compound annual rate of 6.5% over the next five years, which is impressive in light of the weakness in the oil industry. This further indicates that Schlumberger should be able to sustain its strong dividend yield of 2.40% going forward as its earnings growth will remain steady.

Hence, in my opinion, Schlumberger is a stock that investors should remain invested in despite weak oil and gas prices as its financial performance will remain resilient going forward.

By Harsh Singh Chauhan

Copyrighted 2020. Content published with author's permission.

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