Schlumberger: Buy or a Sell?

Schlumberger (SLB) announced first quarter ended March 31, 2016 total revenue of $6.52 billion, down 16 percent sequentially from $7.74 billion in fourth quarter of 2015 and down 36 percent year-over-year from $10.25 billion in first quarter of 2015.

Schlumberger declared first quarter of 2016 non-GAAP net income of $501 million or $0.40 per diluted share, down 39 percent sequentially from $819 million or $0.65 per diluted share in fourth quarter of 2015 and down 63 percent year-over-year from $1.36 billion or $1.06 per diluted share in first quarter of 2015.

The integrated technology, management and information solutions provider for upstream exploration companies reported continued sequential and year-over-year declines in both its top and bottom lines primarily driven by the ongoing weakness in the global commodity demand and pricing environment coupled with untimed delay of major upstream exploration projects by the companies which are running out of cash amid tough global operating environment.

What next?

Moving ahead, Schlumberger is uniquely enhancing capital efficiency by superior asset utilization with assets earlier being underutilized.
The company’s utilization expansion effort reduces capital investments measured by revenue, smaller capital spending leads to smaller depreciation and unused assets are managed centrally.

Schlumberger is proactively involved in optimizing its cost structure by lowering unit support costs, creating shared services company with rationalized internal processes, right-sizing workforce after strategic Smith acquisition and prompt steps taken to counter the downturn supported the workforce and lowered fixed costs. Schlumberger is impressively managing its working capital with globally attractive receivables, integrated maintenance lowers inventory and time-bound inventory management through distribution centers.

The significant efforts of Schlumberger to enhance capital efficiency through well-planned asset utilization while controlling costs and strategically managing the working capital is expected to position it sturdily for delivering sustainable long-term growth and certainly allow it to emerge quickly and strongly from the ongoing global meltdown.

The uniquely developed logistics control towers by Schlumberger has enabled the company to implement real-time delivery tracking mechanism, allow for automated product transfers, provide notifications for detention & late shipments while achieving a significant $250 million of truck savings. Moreover, the advanced process reliability achieved in IDS has enabled the company to lower NPT to 70% from 2011 till 2015, reduce failures through the IDS projects, minimize operational risks while enhance teamwork capabilities.

A majority of the key investment analysts are taking a conservative growth approach for the oil field services companies including Schlumberger with extremely limited cash flows to be leveraged in the company’s daily operations while delivering attractive shareholder returns. The continuing tough global commodity demand and pricing environment coupled with weaker expenditures performed by key upstream energy producers in North America would continue to hurt the margins of oilfield services companies while weakening Schlumberger’s bottom line growth.

The advanced logistics control mechanism of Schlumberger is believed to minimize the operational failure probability of the company’s strategic operations at key wells. Further, a conservative cash spending approach of the oil field services company is expected to support the company in emerging strongly from the ongoing global economic meltdown.

Focus in the right areas

Schlumberger is focused on delivering solid intrinsic performance with declining injury rates, enhanced reliability, significant capital efficiency and attractive free cash flows which is the key for delivering sustainable long-term company growth.

Importantly, Schlumberger has recently and strategically merged with Cameron International Corporation for uniquely combining two matching technology companies into a single energy exploration giant and having superior capabilities of well technology and reservoir of Schlumberger combined with processing, flow control, surface equipment and wellhead technology of Cameron to form industry-leading production and drilling systems.


Overall, the investors are advised to “Hold” their position in Schlumberger Limited considering the company’s significant long-term growth prospects but currency tough global operating environment coupled with weaker company’s financial position with significant total debt of $21.51 billion against weaker total cash position of $14.43 billion only, restricting the company to continue with its daily operations profitably. The profit margin of 5.03% seems attractive. However, the PEG ratio of 19.13 signifies costly company growth.
Published on Jun 22, 2016
By Vinay Singh

Copyrighted 2020. Content published with author's permission.

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