SLB 2017 earnings recap: positive outlook for 2018

SLB reported strong 4Q17 revenue at +15%y/y and adjusted EPS +57%, above consensus expectation.  This was driven by a better pricing environment and growth in North America activity. The management team is targeting to return to its prior cycle margins and ROIC, if not above. We are maintaining our position size and price target.

 Current Price: $76.4                        Price Target: $82

Position Size: 2.3%                          TTM Performance: -12.4%

 

  • SLB reported 4Q17 and full year 2017 results:

 

    1. North America revenues +59% y/y, +8% q/q
    2. International revenue:
          • Middle East and Asia -4% y/y, +2% q/q
          • Europe/CISW/W Africa -1% y/y, -2% q/q
          • Latin America +9% y/y and q/q d. Operating margin 11.3%, better than 3q17 margin of 10.2% and 4Q16 margin of 7.8
          • Higher activity in North American hydraulic fracking market
  • Management optimistic for 2018 with strong earnings growth expected in 2Q and 3Q

 

    1. The management team shared a positive view of the macro oil environment and customer spending
          • “oil market now in balance”
          • “the previous oversupply discount is gradually being replaced by a market tightness premium”
          • E&P survey predicts “15-20% growth in North American investments in 2018”
          • International market expected to grow for the first time in 4 years, with projected 5% increase in spending
    2. Exiting the marine and land seismic acquisition business after re-evaluating its return potential. The company is now focusing on an asset-light business model for their WesternGeco product line
    3. Focusing on North American pressure pumping that is seeing rising activity. SLB has historically been lagging peer Halliburton in this segment, but the recent acquisition of assets in this space (rather than forming a JV with Weatherford) should benefit SLB
    4. Tax reform impact: SLB recorder a net charge of$76M in 4Q17, 2018 effective tax rate to be similar to 4Q17 rate of 19%
  • SLB remains a differentiated FCF story and offers high earnings potential in the upcycle. SLB continues to return cash to shareholders while investing for the future

 

  1. Management continues to invest in their SLB Project Management business: they spent $1.12B in 4Q17 (or 63% of total capital spending), above the typical run rate of $150M/quarter. This quarter included $1B for the Palliser Block in Canada
  2. 2018 capital spending guidance of $2B (expectations were slightly higher than that)
  3. Stock buyback is at its baseline level, with no dividend raise this quarter, but with possibility of increasing it in the future
  4. Net debt/EBITDA looks high at ~4.4x, but remember this is on a depressed EBITDA, which should see a recovery in 2018-2019

             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