Schlumberger: Buy or Sell?

Schlumberger (SLB) announced fourth quarter ended December 31, 2015, total revenue of $7.7 billion, down 9 percent sequentially from $8.5 billion in the third quarter of 2015 and down 39 percent year-over-year from $12.6 billion in the fourth quarter of 2014.

Schlumberger declared fourth quarter of 2015 net income from continuing operations of $819 million or $0.65 per diluted share, down 17 percent sequentially from $989 million or $0.78 per diluted share in third quarter of 2015 and down 58 percent year-over-year from $1.9 billion or $1.50 per diluted share in fourth quarter of 2014.

A closer look

The oil and gas drilling equipment manufacturer reported a continued decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment coupled with slower drilling activities executed across the industry.

Schlumberger is continuously displaying superior industry-leading margins all through its operating cycle with the company’s global top line growth, North American and international margins all exceeding the numbers of its key competitors.
The margin leadership for North America grew during the slowdown in 2015. These impressive financial results were achieved through the expanding market share and strategically balancing the company margins.

The energy drilling equipment maker is attractively managing the current impact of global economic slowdown with improved declining margins compared to the earlier slowdown and primarily supported by a record decline in exploration and production activities coupled with rising pricing pressure. Schlumberger is focusing on implementing cost control techniques to sustain solid financial position while reacting decisively and promptly to curtail disruptions.

The ongoing cost minimization and margins development initiatives of Schlumberger are believed to support the company in successfully overcoming the negative impact of the current downfall while emerging strongly as a leading energy drilling equipment manufacturer.

Making smart moves

Schlumberger is uniquely controlling its year-over-year capital expenditure as a percentage of revenue with better capital efficiency achieved through complete asset utilization. Therefore, the assets that were historically underutilized are now delivering superior financial performance coupled with idle assets now managed centrally with the expanding utilization lowering the capital investments as a percentage of the company’s top line and reduced capital spending bringing down depreciation.

The oil field services equipment manufacturer is continuously minimizing its unit support expenditures and thus, developing a solid cash position and delivering robust cash flow conversion as a percentage of net income which is believed to support the company in illustrating impressive top line growth and delivering sustainable shareholder returns.

The superior asset utilization and minimized capital expenditures are expected to drive long-term company growth and deliver sustainable stakeholder returns.

The usual expansion in worldwide oil production and the US shale growth have together resulted in notable fall in the key oil price since the middle of 2014 and leading to a forecasted decline of about 25 percent year-over-year for fiscal year 2015 energy sector capital expenditures.

In addition, The Energy Information Administration (EIA) estimates net world consumption of approximately 98.4 million barrels per day by 2020 as against 90.7 million barrels per day of energy consumption in 2013.

The slow but steady improvement in global energy demand is expected to gradually improve energy pricing and thus, benefit the energy mining companies including, Schlumberger and allowing it to offer extraordinary shareholder returns.

For the quarter, Schlumberger bought back 5.4 million shares of its common stock averaged at a price of $73.86 per share and totaling buy price of $398 million, in line with its continued commitment to deliver improved shareholder returns. Going forward, the company has strategically approved a fresh share buyback program of about $10 billion.

Schlumberger recently acquired Fluid Inclusion Technologies, Inc. (FIT) which is a US-based oil and gas service corporation mastering in sophisticated borehole gas   study on drilling wells and laboratory examination of trapped fluids in rock.

The consensus estimate among 40 polled investment analysts evaluating Schlumberger Limited suggests that the company would outperform the market. This consensus estimate is maintained since the investment analyst’s sentiments declined on Jun 30, 1998. The earlier consensus estimate suggested investors to make equity investments in the company.

The planned acquisition of new drilling technology company would further add to the drilling expertise of Schlumberger and enhance its overall production, allowing it to generate superior free cash flows and deliver notable stakeholder returns.

Conclusion

Overall, the investors are advised to “Hold” their position in Schlumberger Limited considering the company’s excessive valuation with trailing P/E and forward P/E ratios of 44.34 and 24.84 respectively, compared to solid industry’s average P/E of 17.81 and notable company growth prospects with the steadily improving international commodity demand and pricing environment.

The PEG ratio of -3.53 signifies no growth but decline. The profit margin of 5.84% seems satisfactory. However, Schlumberger needs to optimize its debt-burdened balance sheet with significant total debt of $19.00 billion against weaker total cash position of $13.03 billion only, restricting the company to continue its daily operations profitably.
Published on Apr 12, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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