The last one month has been difficult for Schlumberger (NYSE:SLB). The world's largest oilfield services company has lost around 7% of its market capitalization, and there might be no respite in the short term. In fact, Schlumberger disappointed the Street with a mixed outlook when it reported its second-quarter results.
Although Schlumberger's revenue and earnings were above analysts' expectations, the company is unsure about its performance going forward. In a statement to the press, Paal Kibsgaard, CEO of Schlumberger, said, "The overall global economic outlook continues to be mixed." Kibsgaard cites various reasons for its shallow short-term outlook, such as a harsh winter in the U.S., weak growth in Europe, and a few other reasons.
As such, despite reporting robust year-over-year revenue growth of 8% in the second quarter to $12.05 billion, and a jump in earnings to $1.37 per share from $1.15 per share last year, Schlumberger seems to be in a soup.
The mounting tension between the U.S. and Russia over the Ukraine conflict could affect Schlumberger's operations in Russia. But, the company said there was no significant impact of these issues on its business. Washington has imposed sanctions on Rosneft, Russia's largest oil producer, which is also a major client of Schlumberger in that region. Even though there is no impact right now, the same cannot be said for the future as more sanctions could be imposed on Russia in the days ahead.
Russia accounts for less than 5% of Schlumberger's total revenue, according to Simmons & Co International analyst Bill Herbert. Moreover, if more sanctions are imposed, Schlumberger management is expected to take corrective actions in Russia. On a positive note, Schlumberger management is still expecting a strong performance from Russia after witnessing a strong recovery in activity after a harsh winter in the region. According to Kibsgaard:
The underlying activity outlook both offshore and online in Russia continues to look solid and with recent contract awards in Sakhalin, we expect to finish the year on a strong note.
Iraq: Another bone of contention
In addition, Schlumberger is also facing problems in Southern Iraq, where discussions between the government and international oil companies are still in process. Schlumberger's situation worsened during the previous quarter in Iraq as civil unrest in the region created more complications. As a result, Schlumberger had to beef up security in the area, resulting in additional costs.
It is difficult to say how long this situation will persist in Southern Iraq, and should the situation get worse, Schlumberger will have to take additional safety measures. This will create more pressure on its financial performance. However, the situation in Northern Iraq was strong, and management expects that its solid performance in this region could offset the activity drop in Southern Iraq.
Oil prospects and innovation
Schlumberger sees a slow and steady recovery in the global economy. Moreover, the global oil market is going strong. According to the EIA, global supply of petroleum and other liquids is slated to increase 1.5 million barrels per day in 2014, followed by 1.2 million barrels per day in 2015. The EIA is of the opinion that the U.S. and Canada will be the primary growth drivers behind this growth. In addition, consumption of liquid fuels is expected to grow at an average of 1.1 million barrels per day in 2014 and 1.5 million barrels per day in 2015.
In addition, uncertainty around supply due to geopolitical issues such as in Russia and Iraq could also prove to be a tailwind for Schlumberger. This is evident with the fact that Brent prices are hovering around at more than $100 per barrel. This should lead to an increase in oil-related investments in both North America and the international markets.
The company is also focused on driving technology improvements. For example, rig-based activity in the Vaca Muerta shale in Argentina is being driven by new technology and work flow deployment, apart from a focus on lowering costs. Schlumberger, along with Azabache Energy, started well fracture stimulation at Vaca Muerta earlier this year, with the aim of delivering "sufficient hydrocarbons flow from the Vaca Muerta shale."
In addition, Schlumberger is also seeing an improvement in its land drilling product lines on the back of new technology introductions. Its deepwater drilling activity is improving due to a drop in operational delays.
Beyond the concerns
Apart from headwinds in Russia and Iraq, Schlumberger is doing fine. It is doing well in some areas such as Latin America, where revenue increased on a sequential basis, driven by strong activity in Venezuela, Argentina, and Ecuador. However, its revenue fell in Mexico on a sequential basis due to lower overall rig count, along with continued budget restrictions in Pemex, Mexico's state-owned petroleum company.
But, Schlumberger is positive about its prospects in Mexico going forward. It has started activity on a mega tender, leading to expected market share gains. Also, Pemex and the local government have resolved the social issues that have impacted Schlumberger's IPM (Integrated Project Management) ventures in the south. In North America, the Middle East, Asia, Australia, Europe, CIS and Africa, Schlumberger is experiencing strong growth.
Schlumberger has a trailing P/E of 20, which is lower than the industry average of almost 23. Its forward P/E of 16 reflects expected earnings improvements. Although there are concerns about the short-term outlook, management is confident that Schlumberger's balanced technology portfolio and agile organization will help it gain momentum in the long run. The company's earnings are expected to grow at a solid rate of 17% for the next five years, and considering that it carries a decent dividend yield of 1.50%, Schlumberger could be a solid buy on recent weakness.
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