Earnings estimates have fallen sharply for Schlumberger ( SLB ) following its Q3 earnings report. The drop in consensus estimates has been significant enough to send the stock to a Zacks Rank #5 (Strong Sell).
Schlumberger continues to face major headwinds as a result of the plunge in oil prices . This has led to not only a drop in revenue but in profit margins as well. And the valuation picture doesn't look very compelling with shares trading at more than 20x forward earnings. Schlumberger provides a wide range of products and services to the oil and gas exploration and production industry. The company manages its business through three groups:
- Reservoir Characterization (27% of total revenue in Q3), which is involved in finding and defining hydrocarbon resources.
- Drilling (38%), which is involved in the drilling and positioning of oil and gas wells.
- Production (35%), which is involved in the lifetime production of oil and gas reservoirs.
Third Quarter Results Schlumberger reported its third quarter results on October 15. Revenue plunged 33% year-over-year to $8.472 billion, missing the Zacks Consensus Estimate of $8.556 billion. Revenue fell 31% in the Reservoir Characterization segment, primarily due to "sustained cuts in exploration spending" . Revenue plunged 32% in the Drilling segment, primarily due to "persistent international pricing pressure and activity declines" . And revenue declined 35% in the Production segment, primarily due to "customer budget constraints in the International markets" . Operating income was cut nearly in half as the operating margin fell from 20.6% to 15.8% of revenue. Earnings per share fell 48% to $0.78, although this was ahead of the Zacks Consensus Estimate of $0.76. The cash flow picture is not as weak for Schlumberger though. The company generated $6.6 billion in operating cash flow through the first nine months of 2015, which is down just 9% year-over-year. Estimates Falling Analysts virtually unanimously lowered their earnings estimates for both 2015 and 2016 following the Q3 report. This was significant enough to send the stock to a Zacks Rank #5 (Strong Sell). Unsurprisingly, this negative earnings momentum has persisted since the second half of 2014, when oil prices began to plunge, as you can see in Schlumberger's "Price & Consensus" chart:
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