Bear of the Day: Schlumberger (SLB)

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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:

The current Zacks Consensus Estimate for 2015 is $3.40, down from $3.56 sixty days ago. The 2016 consensus estimate is now $2.93, down from $3.85 over the same period. Valuation Unless oil prices suddenly surge and production ramps up, Schlumberger doesn't look like a screaming value here. The stock trades at 23x 12-month forward earnings, and that's if earnings estimates stop declining. The Zacks Value Style Score for Schlumberger is a 'D'. The Bottom Line With major industry headwinds, falling revenue and profit margins, persistently declining earnings estimates and a forward P/E north of 20, Schlumberger doesn't offer investors much to like right here. Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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