Schlumberger: Time To Abandon Ship?

| About: Schlumberger Limited (SLB)


The pain is real in the oil sector but should you sell SLB on this pop?

Q4 earnings are out and despite the devastation in the top and bottom lines, there is cause to be positive.

The company really is working to control costs and still has strong cash flows.

What is the point of abandoning ship? Wait for some wind in SLB's sails.

Look the pain is absolutely real for shareholders of Schlumberger Limited (NYSE:SLB) and really anyone in the oil sector. I was asked today if it was "time to abandon ship" and sell on this pop. Well, I can see the temptation. This name has long been one of my favorite oil plays. We all know the price of oil has been decimated in the last year, taking the share price of Schlumberger down with it. It has yet to recover and is pulling out all of the stops to prevent itself from bleeding out entirely. The stock is hovering above a 52 week low this week although it is up nicely today with the sector after reporting its Q4 earnings. Despite being hammered in the last few weeks amid the decline in oil prices, the company has managed to increase its payout to shareholders to $0.50 quarterly. I know how ugly the oil sector is. I get it. There is frustration. But we have to think long-term even though its ugly right now.

How long will oil stay depressed? It could be a while, but I will bet my pension that oil marches back toward the $60 mark within a few years max. And so, at about $30 a barrel, I contend you are able to buy quality companies at deep discounts. It's just a question of how long oil prices will stay depressed. Will it be months? Several quarters? Several years? Your guess is as good as mine, but the risk is to the upside from here. That said, we need to examine the company's performance and look to expectations in the present low price environment. On that note the company missed top line estimates but managed to squeeze out a bottom line beat. The company reported fourth-quarter revenue of $7.7 billion. Not surprising given the drop in oil prices, this was down 9% sequentially and down 27% year-over-year. Look that hurts. It also missed estimates by $60 million. That adds insult to injury.

That said, the company swung to a loss from continuing operations (excluding special charges and credits). Loss from continuing operations, was $1.016 billion in Q4 2015. Income from continuing operations, including charges and credits, was $302 million in Q4 2014. Loss per share from continuing operations, including charges and credits, was $0.81 in Q4 2015. This is down heavily sequentially and year-over-year, as earnings per share came in at $0.23 in Q2 2014. As a whole, earnings per share beat estimates by $0.02 and came in at $0.65, but was down severely from the $1.50 in last year's comparable quarter.

Obviously, this is a dramatic drop for such a large company, but given oil prices it is more than expected. The fact that it beat estimates was good news and is a testament to the extreme cost savings measures the company is putting into place. Now, there is no way you can cut expenses to the point where the company could maintain or expand margins with revenues falling this much. As such, margins were also down, despite efforts to cut costs. But they weren't down as dramatically as one would imagine. They dipped to 18.4% from 21.8% last quarter. Interestingly last quarter they were about the same so there is something to be said about the cost cutting here. In fact, cost of revenue dropped from $9.7 billion last year to $6.3 billion in the present year's quarter. Further it is down from the $6.8 billion last quarter. That's impressive. However, as far as margins go, there really isn't much that can be done when the commodity falls so dramatically in such a short time frame. However, there is reason to be positive. Why? Because despite the challenges the company is controlling what it can and has a constructive view of 2016. Chairman and CEO Paal Kibsgaard said the following:

"Negative market sentiments intensified in the fourth quarter, with oil over-production continuing and extending the bearish trend in global inventories. This led to a further drop in oil prices, which reached a 12-year low in January 2016. The worsening market conditions added further pressure to a deepening financial crisis in the E&P industry, and prompted customers to make further cuts to already significantly lower E&P investment levels. Customer budgets were also exhausted early in the quarter, leading to unscheduled and abrupt activity cancellations.

In anticipation of an extended activity weakness in the first half of 2016, we implemented another significant adjustment to our cost and resource base during the fourth quarter. This included a further workforce reduction of 10,000 employees, as well as greater streamlining of our overhead, infrastructure and asset base. This led us to recognize in the fourth quarter $530 million in pretax restructuring charges for expanding the incentivized leave of absence program and reducing our workforce, as well as a largely non-cash $1.6 billion pretax impairment charge for fixed assets, inventory write-downs, facility closures, contract terminations, and other asset impairments.

In spite of the challenging business landscape, we generated approximately $5 billion in free cash flow in 2015, after taking into account capital expenditures of $2.4 billion and $1.4 billion of investments in future revenue streams. We returned $4.6 billion in cash to our shareholders, through $2.4 billion in dividend payments and $2.2 billion in stock buy-backs. We also spent approximately $500 million on technology acquisitions, while increasing our net debt by only $160 million. Our ability to generate cash in this environment has been unmatched in the oilfield services industry, and has given us an unrivaled ability to capitalize on a variety of significant business opportunities.

In this uncertain environment, we continue to focus on what we can control. Throughout the year we took a number of actions to streamline and resize our organization as we continued to navigate the downturn. In continuing to accelerate the benefits of the transformation program across both our Technologies and GeoMarkets in 2016, we believe we will emerge as a stronger company relative to industry peers and competitors once the price of oil and the market conditions in our industry turnaround.

We remain constructive in our view of the market outlook in the medium term, and continue to believe that the underlying balance of supply and demand will tighten, driven by growth in demand, weakening supply as E&P investment cuts take effect, and by the size of the annual supply replacement challenge."

While this is a very long quote to provide, it really shows how open, transparent and very telling management as the company is. In fact, this team is among the best. They do not make false promises and are up front with the strengths and limitations of the sector. Unlike the last huge decline in oil around the Great Recession, Schlumberger is clearly better positioned this time around as evidenced in its performance, particularly in its margins and cash flow generation. Further, the company continues to pay its dividend and bought back another 5.4 million shares at an average price of $73.86. Further, because the present $10 billion share repurchase program that began in Q3 2013 was near complete, the Board also approved a new share repurchase program of $10 billion.

The bottom line here? Do not abandon ship. No sense in doing it now. The company is afloat and just need some wind in its sails from a rising oil price. I think it will outperform the sector as a whole when oil marches higher. It's a waiting game, but you can slowly build a position on big dips in the name, waiting for the rebound like we got this week. Let's not forget you are being paid a decent dividend and of course the company continues to buy back shares. While it's not the best sector to be in right now think long-term. What is the point in selling now? Stay the course.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time-sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I am/we are long SLB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.