Schlumberger (NYSE: SLB) is an oil-services firm based out of four executive offices in Paris, London, Houston, and The Hague. It competes with other oil-drilling and services companies including, Halliburton and Transocean. The company has operations in markets across the world including North America, Europe, Asia, the Middle East and Africa. Oil-services companies had struggled in 2019 due to a slowdown in the shale industry that is affecting rig count. While the slowdown is expected would have weighed on Schlumberger’s revenue and earnings for the year we expect a beat on both these metrics. We currently have a price estimate of $48 per share for SLB, which is higher than its market price.
We expect revenue to come in at $33.7 billion for FY19’, which would translate into a 4% increase year-on-year (versus market expectation of $32.8 billion). Although the decline in number of rigs and fewer contracts from non-U.S. shale companies have been affecting Schlumberger, the company has tried to mitigate some of the issues by diversifying into non-traditional markets such as Asia, the Middle East and Africa. We expect earnings for the year 2019 to come in at $1.65 per share. You can visualize our forecast for the company’s revenue and earnings in our interactive Schlumberger Pre-Earnings dashboard.
An Overview of Schlumberger’s Divisions:
- Production: This division provides real-time evaluation, prevention and, management services. The division accounts for 37% of revenue. ($12.8 billion expected in 2019). The division may not be as affected as the other divisions due to legacy contracts, and contracts from outside of the United States.
- Drilling: This division provides well-drilling services to exploration and production companies. The division accounts for 28% of revenue. ($9.4 billion expected in 2019). We expect this division will be affected the most, with rig count falling throughout FY19.
- Characterization: This division provides evaluation and characterization of deposits, using integrated measurements and interpretation. This division accounts for 20% of total revenue. ($6.9 billion expected in 2019). The division may be affected by the slow down.
- Cameron: This division provides well-head, surface equipment, and flow control system process services. This division accounts for 15% of revenue ($33.7 billion expected in 2019). The division may be affected by the slow down.
Shale output continues may be overly optimistic, but there appears to be value in Schlumberger’s stock:
- Market projections may be overly optimistic, but come the first quarter, we expect these projections to temper.
- Margins have been a focus for Schlumberger as it looks to reduce inefficiencies across its operations.
- In fact, we expect costs to grow slower starting 4th quarter 2019. Therefore, cost controls should have helped Schlumberger’s earnings for FY19 and should continue to help the figure for FY20.
- The North American market, which provides the most potential for growth for Schlumberger, is expected to show only moderate growth.
- Companies in both the Permian and the Eagle-Ford remain circumspect as to whether they will increase output and drill new wells. This would mean Schlumberger’s drilling business will likely continue to struggle in early FY20.
- New Mexico, which has been the latest source of shale oil, is also looking at moderate growth. Therefore, Middle Eastern, Asian, and African markets provide the best growth prospects going forward.
- Profitability may also see further impetus from international operations, specifically offshore operations, which may provide new contracts, and also improve the company’s operational efficiency.
- Despite the $12 billion write-down in the third quarter, Schlumberger’s outlook for earnings remains positive.
With diligent cost controls, more efficient operations, and better quality of growth, Schlumberger’s outlook is quite positive. We expect this to show in the full-year report. And as the management looks to get the company back on track in 2020, Schlumberger’s stock should reflect this with a steady gain.
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