Research Blog – INTERNAL USE ONLY

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. Continue reading “SLB 2017 earnings recap: positive outlook for 2018”

Energy Update January 2018: SLB & XOM

Oil view positive for 2018:
• Late cycle has historically favored the energy sector
• We are coming at a FCF inflection point: cost cutting has been done in a low oil price environment. Recent increase in oil price will be incrementally positive for energy companies
• Volume growth
• Valuation

Adding 50bps to XOM to get to a full 2% position
XOM is seen as a defensive holding compared to peers:
• Strong balance sheet
• Top FCF & dividend coverage ratio
• History of finding good balance of reinvesting in the business and returning capital to shareholders
• March 2018 Analyst Day will provide some updates on potential buyback, could be a catalyst for the stock

Schlumberger Update 2018
In a lower for longer oil price environment, service companies that are able to provide a differentiated offer and/or evolve their business model will be able to exceed last cycle’s peak earnings (reached in 2014). We believe SLB has been able to evolve its business and remains a quality company that has attractive growth driver for the coming years.
1. Schlumberger Production Management (SPM) project: key growth driver, recent projects could add $1B in sales in 2018
• High growth/high margin business with less competition
• Less cyclical with better ROIC
• Attractive offering for cash constrained E&P that are looking to partner with service providers to lower production decline rates and/or increase production. SLB gets a portion of incremental profits created by its service

2. Pick up in offshore activity would benefit SLB the most vs. peers
• SLB clients’ project planning at a 2 year high
• Erosion in international pricing is slowing
• International activity has bottomed in 3Q17

3. Shareholder return to improve
• Top line & margin recovery
• Dividend yield 3%, could be increased in 2018 (better cash flow from operations + stable capex)

Goldman Sachs Sale Recommendation

As discussed today, we are selling Goldman Sachs (GS). Goldman is reliant on trading results which have been lackluster over the past 6 years. Fundamentally, regulation has changed the brokerage business model, reducing opportunity for revenue and crimping margins. Weakness in hedge fund trading has hurt GS results relative to their peers. Given MiFID in Europe, we do not believe these headwinds will likely increase.  Attached is our presentation with an updated slide on valuation which is at or near a 4-year high.  goldman review 101917 RM

CVS 2018 Initial Guidance

Yesterday CVS provided its initial 2018 guidance, which came as a surprise as the management team had previously announced that its guidance would be provided along 4Q17 earnings call. We believe this move is to reassure the investment community on its business growing in line with their expectations (ex-acquisition). Clarity on growth is driving a relief rally in the stock this morning. Continue reading “CVS 2018 Initial Guidance”