- Oilfield service giant Schlumberger recorded total revenues of $5,847 million for the third quarter of 2021, in line with analysts' expectations.
- The results were definitely positive, guiding to improved margins, which beat expectations.
- I recommend buying SLB at or below $32.
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Houston-based Schlumberger Limited (NYSE:SLB) released its third-quarter 2021 results on October 22, 2021.
The World's top oilfield services provider came out with third-quarter of 2021 earnings of $550 million or $0.39 per share, in-line with analysts' expectations. Revenue was up 11.2%, from $5.258 billion last year to $5.847 billion.
The solid results were due to stimulation activity in Argentina, stronger North American rig activity, and ramped up drilling operations in both offshore and onshore international segments. However, activity from Digital & Integration from Europe/CIS/Africa was lower than expected.
The results were definitely positive, guiding to improved margins, which beat expectations. However, SLB suffered some selloffs after announcing the results and seems to be struggling since then.
CEO Olivier Le Peuch said in the conference call:
The third quarter results further emphasize our returns focus, consistent execution, and the advantaged mix of our portfolio. Growth momentum was sustained and we delivered a fifth consecutive quarter of margin expansion, achieving the highest pretax operating margin since 2015 and cash flow from operations in excess $1 billion.
The investment thesis has not changed since the preceding quarter. Schlumberger is a solid business that I consider a great option from a long-term perspective.
However, oilfield services are highly dependent on oil prices and are subject to wide fluctuations. It means that this investment presents a higher level of risk and a lower dividend compared to some oil majors like Exxon Mobil (XOM).
Hence I recommend keeping a medium core long-term position and using 50% of your position to trade short-term LIFO, the most adapted strategy with such volatile stocks.
You can see it as insurance against the inevitable oil booms and busts that we've experienced so many times and that we are likely to experience the remaining of 2021 and 2022.
As we see below, Schlumberger has followed the VanEck Vectors Oil Services ETF (OIH) closely and outperformed its main rival Halliburton (HAL) and Baker Hughes (BKR). SLB is up 123% on a one-year basis.
Revenue details: Schlumberger versus Halliburton in 3Q21
Schlumberger and Halliburton have very similar business models and are considered the most powerful oilfield services companies. Let's compare the two.
As I said above, both companies were in line with expectations and are increasingly optimistic about 2021 prospects. CEOs Olivier Le Peuch and Jeff Miller were clearly optimistic about 2021.
CEO Jeff Miller said in the Halliburton PR:
I see a multi-year upcycle unfolding. Structural global commodity tightness drives increased demand for our services, both internationally and in North America.
One unique characteristic is that Halliburton's revenues rely more on the US segment, making it more vulnerable than Schlumberger's.
1 - Comparison per region
Schlumberger's total revenues were $5.847 billion in 3Q21. The North American region represented 19.3% of the total revenues.
On the other hand, Halliburton has a much more significant presence in North America, representing 41.8% of its total revenues of $3.860 billion in 3Q21.
Thus, Halliburton's business model is more sensitive to any change in business activities in the North American region. Conversely, Schlumberger has more presence in the Middle East and European segments.
2 - Comparison per segment
Schlumberger's revenue repartition includes four categories or units (including Cameron Group), while Halliburton indicates only two. Basically, it is the same but classified slightly differently.
However, it is easy to compare both companies with the graphs below:
If we compare activities per segment with Halliburton, we see a similar pattern between Drilling and Production.
3 - Detailed revenues per region: Comparing 2Q21 to 3Q21
This chart confirms what has been said above, Halliburton revenues are higher in North America.
Schlumberger: Financials: 3Q21, Trend And Raw numbers
|Total Revenues in $ Billion||5.26||5.53||5.22||5.63||5.85|
|Net Income in $ Million|| |
|EBITDA $ Million||84||1,198||1,054||678||1,351|
|EPS diluted in $/share|| |
|Cash flow from operating activities in $ Million||479||878||429||1,220||1,070|
|CapEx in $ Million||200||258||178||243||282|
|Free Cash Flow in $ Million||279||620||251||977||788|
|Total Cash $ Billion||3.84||3.01||2.91||2.68||2.94|
|Total LT Debt in $ Billion||17.76||16.89||16.89||15.72||15.40|
|Dividend per share in $||0.125||0.125||0.125||0.125||0.125|
|Shares Outstanding (Diluted) in Million||1,391||1,411||1,419||1,421||1,424|
Source: Company release
Revenues, Free Cash Flow, And Debt Analysis
1 - Revenues of $5.847 billion at the end of September 2021
Oilfield service giant Schlumberger recorded total revenues of $5,847 million for the third quarter of 2021, in line with analysts' expectations. Net income came in at $0.39 per share.
Revenues were significantly higher sequentially.
CFO Stephane Biguet said in the conference call:
Margins expanded sequentially in 3 of our 4 divisions, with very strong incremental margin in both Reservoir Performance and Well Construction. This performance was due to a favorable geographic mix, driven by continued international revenue growth, as well as a favorable technology mix with increased exploration and appraisal activity and new technology adoption.
- Digital & Integration
Revenues totaled $812 million, up 10% from last year. Pre-tax operating income was $284 million, up 42% year over year. The higher contributions came from the Asset Performance Solutions projects but were partially offset by declining Europe/CIS/Africa contributions.
- Reservoir Performance
Revenues declined 2% year over year to $1,192 million. Pre-tax operating income was $190 million, up 85% year over year. The solid profit was due to increased stimulation activity in Argentina and enhanced wireline evaluation activity in Guyana and Mexico.
- Well Construction
Revenues rose 24% from last year's quarter’s levels to $2,273 million. Pre-tax operating income jumped 99% year over year to $345 million. The increase was due to stronger North American rig activity and increased drilling operations at offshore and onshore international resources.
- Production Systems
Revenues amounted to $1,674 million, up 9% from the year-ago quarter’s numbers. Pre-tax operating income rose 26% from the prior-year quarter’s levels to $166 million. An increase in sales of well and surface production systems was responsible for the improvements. This was offset partially by lower sales related to midstream production systems.
- 2021 outlook
Schlumberger expects its 2021 CapEx at $1.6 billion, up from $1.5 billion in 2020.
The oil demand has improved drastically in the past few months, and the company expects this trend to continue for the next few years. This trend will drive upstream investment, especially in international resources, and will certainly benefit from the improving demand for oilfield services.
CEO Olivier Le Peuch expects North American capital spending would increase by roughly 20% in 2022, in line with a recent forecast from its main competitor Halliburton. He expects international spending to see mid-teen growth.
2 - Free Cash Flow was $788 million in 3Q21
Note: The generic free cash flow is the cash from operating activities minus CapEx. The difference is how the CapEx is calculated. Schlumberger used a CapEx, including investments in APS projects and multi-client. I used a CapEx of $282 million.
Trailing twelve-month free cash flow was $2,609 million ttm, and 3Q21 free cash flow was estimated at $788 million.
The free cash flow covers the dividend payment. The quarterly dividend is $0.125 per share or 1.57%, which is a cost of $712 million yearly.
3 - Net Debt is $12.45 billion at the end of September 2021
On September 30, 2021, the company had approximately $2,942 million in cash and short-term investments, up from $2,682 million in 2Q21. The company indicated a net debt of $12.45 billion.
Long-term debt (including current) of $15,395 million at third quarter-end, down from $15.723 million at the end of June 2021, with a debt to capitalization of 53%.
Technical Analysis and commentary
Note: the chart has been adjusted for dividends.
SLB forms an ascending triangle pattern with resistance at $34.75 and support at $32. The trading strategy is quite simple here.
I suggest trading short-term LIFO for about 50% of your position. I recommend selling partially between $34.5 and $35 and potentially waiting for a test at $36.5 in case of solid momentum later.
Conversely, it is reasonable to accumulate on any weakness below $32. If SLB crosses the support, then the next lower support is between $30 and $29.
Trading LIFO is an excellent way of trading your long core position. Even if you experience a higher tax rate burden, it will reward you with a much higher profit overall while reducing your risk.
Warning: The chart analysis above is valid only if it is updated frequently. It is what I am doing for my subscribers only.
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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
I trade short-term SLB.
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