Schlumberger: Underperformance Presents An Opportunity For Investors (NYSE:SLB)


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For the most part, fiscal year 2022 has proven to be incredibly optimistic for any company engaged in the oil and gas space. This has been true across the spectrum of companies, including those dedicated to offering various services in the industry, such as digital workflow solutions, seismic data interpretation, reservoir-focused technologies and services, well construction, and other related offerings. Unfortunately, not all players have seen the same advantage. Some have been delayed in their space. A great example of this is Schlumberger (NYSE: SLB).

Despite posting positive financial results so far this year and although the company is expected to report relatively strong results for the second quarter of this year, the company’s shares have performed less than most other players in this field, as well as in the Energy Select Sector SPDR ETF (XLE). Given the current stock price and assuming energy prices remain high, there are likely to be more advantages for this business. And given how well the company has fared in lower energy price environments, I don’t think this drawback has to be realistically significant from here on out, as long as the price bottom doesn’t fall. That’s why I decided to keep my “buy” rating on the company.

Focus on Schlumberger numbers

In April of this year, I published an article detailing why Schlumberger created an attractive “buying” opportunity. Since then, the company’s performance has not been as great as it would have expected. While the S&P 500 is down 13.8%, shares of this energy services company are down 14.2%. This includes the dividends the company pays. Although this is better than the return of other players during this time period, such as Halliburton Company (HAL), is worse than the 10.9% drop in XLE. With a longer time horizon, however, it’s worth noting that the company’s performance has actually lagged behind many of its peers. As you can see in the table below, only one of the five Schlumberger-like companies I identified performed worse than him from the beginning of the year to the present.

Company Annual return to date
Schlumberger 16.8%
Halliburton Company 34.3%
Baker Hughes Company (BKR) 19.3%
Tenaris SA (TS) 22.0%
NOV Inc. (NOV) 21.6%
ChampionX Corporation (CHX) -4.3%

The last time I wrote about the company, we only had data on the last quarter of the company’s 2021 fiscal year. We now have data for the first quarter of the year. And the results that have been seen there have been promising. Revenue during this quarter was $ 5.69 billion. That’s 14.1% more than the $ 5.2 billion the company reported at the same time a year earlier. Revenue exceeded analysts ’expectations by $ 37.5 million for this quarter. In addition, the company’s profitability was quite positive. Earnings per share were $ 0.36, beating analysts ’expectations by $ 0.03. This translated into net profits of $ 510 million, 70.6% more than the $ 299 million generated a year earlier. Other profitability indicators were positive. It is true that operating cash flow decreased year over year, from $ 429 million to $ 131 million, but if we adjust to changes in working capital, it would have increased from $ 886 million to $ 1.30 billion. dollars. Meanwhile, EBITDA rose from $ 1.05 billion in the first quarter of last year to $ 1.25 billion this year. In view of the good performance, management even increased the company’s dividend by 40%, bringing the effective return at current prices to just over 2% per annum. This translates into $ 989.4 million in annual cash payments at the time of writing this article.

Schlumberger's financial history

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When it comes to the upcoming second quarter release, analysts continue to expect positive results for the company. Revenue is projected to be $ 6.27 billion. If this comes to fruition, it would translate into an 11.3% increase from the $ 5.36 billion reported in the same quarter a year earlier. This should be considered an impressive result considering that the company ceased any new investment and deployment of technology in Russia at the end of the first quarter of this year. The company did say it was complying with any existing activity in full compliance with international laws and sanctions. Therefore, there may be some overexposure in Russia in this second quarter release. And although, Russia accounted for 5% of the company’s revenue in the first quarter of this year. So still generating a strong advantage while losing some of it is a big plus.

SLB Financial Histories

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For fiscal year 2022, management has not provided any real guidance. But from a review of the company’s historical financial results, I think an EBITDA of between $ 6.9 billion and $ 7.2 billion, as well as an operating cash flow of between $ 5.5 billion and $ 6 billion, is realistic. This would compare to the $ 4.93 billion in EBITDA reported for fiscal year 2021 and the operating cash flow of $ 4.29 billion, on an adjusted basis, also for that year. For investors worried about a possible market weakening, my answer would be that this is unlikely to happen this year.

Given all the problems related to Russia, I don’t see an oversupply of crude oil and natural gas until at least next year. And that is likely to be generous without a significant economic crisis. I’m not the only one who thinks that. Last month, Olivier Le Peuch, CEO of Schlumberger, said global spending on oil exploration and production is “about to accelerate widely,” which will eventually lead to increased production. He sees a particular strength in the offshore oil sector, with potential growth of around 50% over the next four years compared to the period from 2016 to 2019. During this time, he also expects an improvement in prices in the industry. of oil field services as demand for their services will increase. Still, the market seems concerned about the recent drop in energy prices, as the Biden administration is trying to cut costs and as fears of a possible recession and rising interest rates rise.

Multiple SLB stock trading

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Even if short-term concerns arise, Schlumberger’s downside is unlikely to be all that stuff. If my own forecasts for the company’s fiscal year 2022 are correct, then it is trading at a forward price with an adjusted operating cash flow multiple of 9.1 and an EV to EBITDA of 9.1 . If, on the other hand, we use the company’s performance for its 2021 financial year, these multiples would be 12.2 and 13, respectively. While performance in 2020 was even worse, it’s important to note how painful that year was due to the global economic closures caused by the COVID-19 pandemic. In the previous three years, the company’s financial performance was quite robust even though energy prices were much lower than they are today. Operating cash flow ranged from a low of $ 5.78 billion to a high of $ 5.89 billion on an adjusted basis, while EBITDA was between $ 6.74 billion and $ 7.10 billion. . Most likely, Schlumberger would still be able to achieve solid results even in the event of a recession.

Company Price / Operating cash flow EV / EBITDA
Schlumberger 12.2 13.0
Halliburton Company 16.5 12.7
Company Baker Hughes 14.1 12.9
Tenaris SA 672.3 6.6
NOV Inc. 29.6 30.2
ChampionX Corporation 20.6 9.6

As part of my analysis, I also compared the company to the same five companies I looked at earlier. Depending on the price in the operating cash flow, these companies ranged from a minimum of 14.1 to a maximum of 672.3. Our perspective was the cheapest of the group. Using the EV approach to EBITDA, the range was 6.6 to 30.2. In this scenario, using our 2021 results, Schlumberger was more expensive than all but one company. But looking to the future, only one of them was cheaper than him. And absolutely, I would say the stocks seem pretty cheap right now.

Take away

From the data provided, I believe that Schlumberger is a solid operator and that its services will definitely be needed to move forward. I understand the concern some investors have. However, the company’s solid track record, combined with its low stock price and given current market conditions, makes me believe there are more advantages for investors right now. It may require patience, but if management can meet or even exceed expectations for next quarter’s launch, the company is likely to generate strong value for its investors.



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