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Schlumberger: A Bird's Eye View
09/02/2019 5:00 am EST
One of the events I look forward to most is the earnings release from Schlumberger (SLB); each quarter, I take a deep dive into the firm's results and what they mean for the industry, asserts Elliott Gue, editor of Energy & Income Advisor.
There have now been three different CEOs since I began covering this company some 20 years ago and market conditions for the company have changed dramatically over the years.
However, one thing has remained constant — Schlumberger has an almost unique bird’s eye view of the industry with tentacles expanding into just about every oil-producing region of the world from West Texas to central Africa, Russia and Asia.
Over the years, management has always been a useful font of information regarding industry trends. Schlumberger’s Q2 revenue increased 5% sequentially, led by an 8.5% increase in its international business.
International growth outpaced the 6% increase in the active rig count outside of North America and management stated more than half of Schlumberger’s international markets posted high single digit revenue growth or better on a year-over-year basis.
Management is looking for total growth of 7% to 8% in 2019 compared to last year. Given revenues already booked in the first half, the top end of that forecast growth range implies that SLB’s international revenues will grow about 10.3% in the second half of 2019 relative to the first half, which would also be more than double the average second half step up of 4.4% over the past two years.
And the recovery appears broad-based in Q2. Highlights include a 30% jump in offshore exploration revenue — wireline services used to evaluate reservoirs being explored — in the first half of 2019 relative to the same period one year ago. Also, shallow water offshore revenues surged 14% in the first half.
It appears the recovery in international spending continues to gain traction and management sounds more confident in the growth prospects in the second half of this year and into 2020. Revenue growth outside North America is the best it has been since the tail end of the last big energy cycle in 2012-13.
On the other hand, there has been no meaningful growth in North American revenues. In fact, Schlumberger is anticipating a big slowdown in North America in Q4 2019 driven by a combination of normal seasonality and, more importantly, budget exhaustion.
In effect, US E&P capital spending was skewed to the first half of 2019, meaning that most of the major producers plan to reduce spending in the second half. Like last year, they’ll simply run out of CAPEX budget for 2019 towards the end of the year.
The good news for Schlumberger is that it’s less exposed to the challenging North American services environment than its major peers. That’s because the company derives about two-thirds of its revenues from outside North America where it’s already seeing an upturn.
As Schlumberger’s management team reported in its Q2 call, the company’s market share and product mix in international markets give it about 4 times the upside earnings leverage to the upturn underway as compared to its largest competitor (Halliburton).
Longer term, rapid shale development and production growth in the US have created inefficiencies in the industry and the relationship between services firms and producers.
Schlumberger has long been known for innovation and it has long pursued a strategy emphasizing smarter production growth and well efficiency over brute force and building pressure pumping horsepower. In short, Schlumberger is making all of the right moves in North America and ultimately, we think the status quo in this market is unsustainable.
That said, Schlumberger is in the midst of a management transition right now with Paal Kibsgaard stepping down as CEO on August 1 (after a roughly 10-year run at the top) to be replaced by the company’s current COO, Olivier Le Peuch. Mark Papa, shale legend, former CEO of EOG Resources and current CEO of Centennial Development, will also be taking over as Chairman of the board.
New CEO Olivier Le Peuch was, as expected, fairly quiet on long-term strategic moves during their July conference call but indicated he plans to reveal more this fall where he’s scheduled to speak at a number of industry conferences.
All told, Schlumberger benefits from its industry-leading exposure to healthier international markets and its differentiated, technology-focused approach to improving North American profit margins. We also see the company’s management transition and the new CEO’s planned communications on strategy as possible upside catalysts for the stock this fall.
SLB’s new CEO reaffirmed his commitment to the company’s $0.50 per quarter dividend. Based on consensus free cash flow estimates, Schlumberger will not cover the payout this year though funding it should be no problem given the company’s recent non-core assets sales.
In 2020, however, even assuming ongoing weakness in North America and a slow-but-steady improvement internationally, free cash flow should be comfortably above what’s needed to pay its dividend. The current yield stands at more than 5% on the stock.
Bottom line: Well positioned and with several upside catalysts this year, Schlumberger is our favorite diversified oil services stock to buy right now.
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