Key Takeaways:
Current Price: $59.2 Price Target: $82
Position Size: 1.73% 1-year Performance: -8%
Schlumberger 3Q18 earnings results were slightly above recently lowered expectations. The growth in North America slowed down from last quarter, constrained by pipeline capacity and workers availability (to be resolved by the end of 2019). The sector is however recovering globally. Ongoing improvements of the oil producers investments level helps lift SLB sales, which increased 8% y/y. Operating margin expanded 15bps y/y, and adjusted EPS grew 10% y/y. FCF yield remains attractive at 4.7%. The management team warned of lower profits in 4Q18 vs. 3Q18, as US fracking activity continues to drop.
Segments review:
Drilling sales +15%: Saudi Arabia and Russia drilling activity helped. margin down 24bps y/y
Production: some slow down following strong growth recently: +13% sales growth y/y but flat sequentially, margins flat y/y
Reservoir Characterization: sales -6% but operating margin expanded 470bps thanks to better product mix
Cameron: continued pressure on their Deepwater business, sales flat y/y, and margin deleverage of 356bps
Geographic review:
North America sales +23% y/y
International sales +1% y/y
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
$SLB.US
[tag SLB]
Julie S. Praline
Director, Equity Analyst
Crestwood Advisors