Schlumberger: Buy for Big Gains

The oilfield service companies have seen consistent decline in their top as well as bottom lines due to decrease in the U.S rig count and reduced activity levels across the world. One such case is Schlumberger (SLB) that has witnessed 17% and 9% decline in its revenue and earnings respectively for the fourth-quarter sequentially. The decrease in the revenue was primarily due to pricing pressure and reduced activity levels globally that had negative impact on drilling and measurements and M-I SWACO.

However, the impressive part is that its shares have rallied approximately 13% despite this drop in its top as well as bottom lines.
This is due to the fact that its earnings were still able to beat consensus estimates of $0.63 per share by $0.02. Also, strong cash flow of $8.8 billion during 2015, including $2.2 billion in the fourth-quarter alone positively impacted its share price performance.

In reality, this strong cash flow generation is despite Schlumberger making severance payments of approximately $800 million during 2015 and $200 million during the fourth quarter. This helped the company to approve a new $10 billion share buyback program and return $4.6 billion of cash to its shareholders through $2.4 billion in dividend payments and $2.2 billion worth of stock buyback. This looks pretty impressive and should positively impact its share price performance going forward. However, the company plans to initiate this program after the remaining $1.4 billion of authorization under the current program is over.

Costs measurement initiatives are improving its margins

Schlumberger is taking impressive steps to alleviate the downturn in the commodity market. This includes reduction in its headcounts, streamline and resize of the organization, excellent supply chain management and investment in the technology. These efforts are helping the company to keep its margin intact despite the downturn in the oil and gas markets. For instance, Schlumberger during the quarter reduced its workforce by 10000. This is on the top of 24000 reductions in the first-three quarters of the year.

These proactive efforts have helped the company to keep its global operating margin at resilient 18.4% for 2015. Though it’s overall operating margins illustrates a 342 basis points decline year-on-year basis, but considering the downturn for the six consecutive quarters makes it pretty appealing.

In fact, the company improved its margin in some regions despite the fact that its revenue was declined sequentially. For example, in Latin America its revenue declined 1% sequentially with pre-tax operating margins improving by 229 basis points to 23%. The chart below shows its margins against its peers such as BHI and HAL that remains pretty strong.

Risks to consider

Schlumberger has a number of risks such as low production, reduction in rig counts and reduced activity levels as well as lesser spending by E&P companies in 2016. These constraints will impact its top and bottom line performance this year. According to the short-term report by EIA, the crude oil production in the United States to average 8.7 million barrel per day in 2016 and approximately 8.5 million barrel per day in 2017. This compares to crude oil production of 9.4 million barrels per day in 2015.

In addition, the U.S rig counts are expected to further decline in 2016 before rising in 2017. As per a report by Oil & Gas Journal, the U.S rig count will decline approximately to 956 units, which are nearly 220 units lower than its previous guidance for 2016. However, the rig counts in the region are expected to rise in 2017 and 2018 to average 1391 units and 1643 units respectively.


Schlumberger continues to enhance its operating efficiency by costs reduction efforts, which is improving its margins during this downturn. Also, the company is investing in the new technologies such as SCREEN PLUS, M-I SWACO Drilling Solutions and PowerDrive Orbit vorteX- a motorized rotary steerable system that continues to maximize recovery for the oil producing companies. The company expects these technologies will gain tremendous traction once the upturn in the oil takes place and drive its profitability.
Published on Mar 15, 2016
By Vinay Singh

Copyrighted 2020. Content published with author's permission.

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