Q3 results were in line with expectations as SLB reported EPS of $.42/share. This was driven mostly by the strength of the North America land market and growth in key international markets like Russia, the North Sea, and Asia. SLB continues to invest through Schlumberger Production Management (SPM) and yesterday announced a definitive agreement to purchase the Palliser Block in Canada from Cenovous Energy. Technological advancement continues to be a driving force for growth as SLB looks to partner up with Google and Microsoft to capitalize on the latest advances in digital technology. Energy price recovery has been slow and the timing and pace remain an unknown. On the call, management talked down guidance for North American growth in Q4.
Current Price: $62 Price Target: $82
Position Size: 2.0% TTM Performance: -22%
1. SLB reported Q3 operating EPS of $.42 in line with consensus
a. North America drove revenues higher increasing 18% sequentially, with land based revenues up 23%
b. Hydraulic fracturing revenues increased 42% while directional drilling-related services increased by 22%
c. Internationally, revenue was up 2% sequentially
a. Middle East and Asia up 1%
b. Saudi Arabia was flat with weather offsetting gains from improved productivity
c. Revenue in Latin America was down 5% due to lower multi-client seismic sales
d. Agreement was reached with partners and the government in Ecuador to settle overdue receivable account balance
d. Revised the tariff relating to Shushufindi contract and is now in line with current reservoir performance potential
2. Management remains positive about the longer term comeback in oil
a. Growth in oil demand continues to be very strong and upward growth provisions in 2017 were seen in OECD countries
a. Demand growth outlook for 2018 is expected to be north of 1.4 million barrels per day and is supported by increased global GDP growth
b. Believe that oil inventory position is more positive than what is currently being reflected in the market
a. North American production growth has fallen short of expectations
b. The more tempered activity outlook for U.S. land and short cycle nature of business has an impact on production growth outlook
c. On the OPEC side, compliance with the state production cuts has been better than expected but an extension of cuts beyond the current agreement is unlikely
3. SLB remains a differentiated FCF story and offers high earnings potential in the upcycle. They have ample cash > $6B on hand and continue to return cash to shareholders (3% dividend yield + modest buyback) and invest for the future
a. Management continues to invest in their SLB Project Management business (hopes to double revenues in 2 years) which earns a much higher return on capital then other businesses and is less cyclical
b. SLB believes that replacing the industry’s fragmented approach with a new focus on complete technology systems holds a massive performance upside
a. Broader work packages can help costs and performance
b. End to end work flow is next step in industry technology
c. E&P workflows need to be advanced by digital technologies
c. Globally, SLB has gained market share in almost every business line over the past 5 years. They have leading market share in most of the verticals they operate in (excluding US land where they are evenly matched with HAL)
Oil prices remain low as supply/demand struggles to balance
SLB Thesis:
1. After 5 years of significant underperformance, The Energy Sector is historically cheap and SLB is historically cheap relative to the sector – despite being one of the highest quality Energy companies in the world
2. As the leading Global Oil Services company, SLB is well positioned to benefit from (1) Secular growth in U.S. shale production and (2) Cyclical rebound in global oil production/oil prices
3. SLB is a high quality company within a highly cyclical industry – SLB has generated 16% annual Returns on Invested Capital over the past 10 years and throws off a lot of free cash flow
4. SLB’s stock is highly levered to increasing oil prices and will not wait for the turn to make its move. We are also getting closer to a bottom in EPS estimates and SLB protects better than most energy stocks on the downside due to its high quality nature – strong balance sheet, ROIC, cash flows