Year to date, SLB SLB shares have lost 14.9%, significantly underperforming the industry’s decline of 4.8%. The slowdown in North American and international drilling activities has reduced the demand for SLB's products and services, including those aimed at optimizing well placement, maximizing drilling efficiency and more, contributing to the underperformance in the company's share price.
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The critical question now facing investors is how to position themselves regarding the stock. Before addressing this, let us review some fundamental aspects of the energy major.
Global Drilling Slowdown: Cause of Concern for SLB Stock?
In its latest worldwide rig count report, Baker Hughes Company BKR revealed the North American rig count of 779 for July, a significant drop from the 858 rigs recorded in the same month of 2023. This decrease suggests that exploration and production companies have been reducing their capital expenditure budgets for drilling activities. The shift is primarily driven by the growing pressure from shareholders, who are prioritizing capital returns over additional investments in exploration and production.
Image Source: Baker Hughes Company
The U.S. Energy Information Administration, in its latest short-term energy outlook, forecasts U.S. crude oil production at 13.2 million barrels per day (MMB/D) for 2024, suggesting a rise from the 12.9 MMB/D reported in 2023 and 12 MMB/D in 2022. Despite this overall increase in production, the year-over-year growth rate is expected to slow down to 2.3% in 2024 from the 7.5% observed in 2023. This decline underscores a broader trend of reduced drilling activities in North America, which could diminish the demand for services from major oilfield service provider SLB.
The rig count data from Baker Hughes also indicates a slowdown in drilling activities in the international market, which significantly contributes to SLB's revenues. Consequently, the demand for the company's services, such as reservoir productivity and performance optimization, is expected to decline in both North America and international markets.
Nevertheless, there is no need for concern, as SLB has highlighted in its second-quarter results that it anticipates handsome growth opportunities beyond this year. These include large-scale gas and deepwater developments, as well as expanded production and recovery efforts.
Strategic Contracts Secure SLB’s Financial Gains
SLB secured significant contracts, including a major one from Petrobras PBR for subsea production systems and another for a large-scale carbon capture project on the U.S. Gulf Coast.
The key project from Petrobras, announced on Aug. 2, involves the second development phase of the Atapu and Sepia fields, which are situated in the highly productive pre-salt Santos Basin offshore Brazil. SLB will manufacture most of the technology and equipment for use in these developments, including vertical trees and subsea control systems, at its facilities in Brazil. The contract will generate substantial cash flows, and the leading oilfield service company has announced that it will maintain its investments in Brazil as the country continues to be a crucial area for growth.
The large-scale carbon capture project on the U.S. Gulf Coast underscores SLB’s strong commitment to addressing climate change. On Aug. 1, the joint venture between SLB and Aker Carbon Capture was awarded a contract for the front-end engineering and design of a large-scale carbon capture plant. This project will be capable of capturing 800,000 tons of carbon emissions annually from a pulp and paper mill on the U.S. Gulf Coast. This initiative underscores SLB’s strong dedication to carbon capture, which could potentially yield significant long-term financial rewards for the company.
Time to Keep an Eye on SLB?
While SLB is expanding into carbon capture, the market is still in its early stages. The ability of the carbon capture business to significantly contribute to SLB’s revenues is still evolving. Additionally, the company’s growth prospects are closely linked to oil prices. Although current prices are favorable, they are highly volatile, and any decline could affect SLB’s operational performance and profitability.
Despite these challenges, most analysts are optimistic that the Zacks Rank #3 (Hold) energy giant will achieve industry-leading margins, supported by its unique operational footprint and advanced technical and digital capabilities.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Nevertheless, investors may want to await a more favorable entry point. This is because, at this moment, the company’s shares are somewhat expensive on a relative basis, with the current 8.48X trailing 12-month Enterprise Value/Earnings before Interest Tax Depreciation and Amortization trading at a premium to the broader industry average of 6.91X.
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