Schlumberger: Rock Solid

About: Schlumberger Limited (SLB), Includes: CAM, COP
by: Dave Dierking, CFA

Cutting capex by 40% and laying off 10,000 workers has given the company much needed liquidity and flexibility.

The company has $13 billion in cash and short-term investments on its books.

Schlumberger's balance sheet could help it pick up assets from struggling businesses at below market prices.

The company has generated over $6 billion in free cash flow over each of the past three years.

The dividend is now at almost 3%.

With energy prices beginning to level out, the imminent demise of the entire energy sector might be a bit overblown. While there will certainly be smaller businesses that will have a tough time surviving in the low crude oil price environment, many of the big names with rock solid financials will be able to not only do well but also take advantage of the misery of others.

Schlumberger (NYSE:SLB) is one of those companies. Amid the wreckage of the stock price over the past couple of years from its peak of nearly $120 all the way down to $73 currently is the fact that the company has taken steps to strengthen its balance sheet in a challenging economic environment.

2016 revenue for Schlumberger is expected to be down over 20% compared to the prior year. Therefore, the company has taken steps to improve its liquidity and cash cushion while it waits out the low oil environment. The company slashed its capex by roughly 40% in 2015 (from $4 billion the prior two years down to $2.4 billion) and let go of about 10,000 workers. Schlumberger also recently announced a $10 billion share buyback.

These two moves enhance the company's liquid position. Schlumberger had about $3 billion in cash on its balance sheet as of the end of 2015. Add in short-term investments and the company has a total of $13 billion on its books. Schlumberger has also delivered between $6 billion and $7 billion in free cash flow over each of the last three years (although, to be fair, that number will probably come down in 2016). Despite being in a tough economic spot, Schlumberger still has a lot of cash to work with.

Some of that liquidity is going to go towards completing the Cameron (NYSE:CAM) acquisition, but the transaction jumped through all the necessary regulatory hurdles, including sign-off from the Chinese Ministry of Commerce, and indications are that the merger has been largely positive. The company issued roughly $6 billion in debt to help fund the shares used in the Cameron merger, but even that is only expected to increase interest expense by roughly $40 million to $50 million per quarter, a number that can easily be covered by free cash flow.

Schlumberger's strong balance sheet should also help keep the quarterly dividend safe. The stock price drop has pushed up the yield to nearly 3%. Even if the company's cash flow were to weaken to the point where a dividend cut would be a consideration, it's not a guarantee that it would necessarily be a bad thing. A dividend cut could provide additional liquidity to help the company make it through the current low oil environment. ConocoPhillips (NYSE:COP) cut its dividend on February 4th, and the stock is up more than 10% since the announcement - a sign that investors view the cut as balance sheet strengthening as opposed to a sign of financial distress.

Schlumberger's balance sheet also gives it the opportunity to capitalize on the potential asset sales of others. Smaller oil and gas companies have been limiting production and selling off assets in order to stay afloat. A company like Schlumberger would have the resources to potentially pick up some of these assets at below market prices and further enhance its revenue generation capabilities going forward.


In this economic environment for energy companies, you want to stick with companies with strong balance sheets. While Schlumberger's stock has been hit hard during the course of the past two years, long-term investors could find now to be a nice buy low opportunity while picking up a nearly 3% dividend in the process.

There are some yellow flags. Investors will want to keep an eye on cash flows to see how the current environment is affecting it. Plus, at 28 times forward earnings, it's far from an inexpensive stock. But I think now could be a good time to pick up a quality oil services business with a balance sheet that will help it capitalize when oil prices start moving back up.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.