There have been recent articles with Tabloid undertones regarding SLB. I would like to offer a counter-point as to why I believe SLB remains one of the most attractive investments in the energy space for the next 12-18 months
- Supply/Demand fundamentals bound to change in the next 12-18 months; Anyone reading energy headlines would think that there's a 10%+ oversupply. The matter of fact is that the world demand is ~94mmb/d and growing between 1%-3%. Other than 2009, there has not been a supply contraction in the last 25 years. Supply is 95mmb/day and relevant cost competitive producers (i.e. Russia, Saudi and ME, selected shale players) are running at 90%+ capacity. Storage is at all time high but accounts for less than 3 months of demand so that could change. The most important point is that $100BN has been cut from E&P Capex reducing the future gap between growing demand and supply. Furthermore absence of investment accelerates the natural depletion of sources so it's not impossible to think that we could see demand at 96-97mmbpd in 2018 with a 1-2mm bpd supply shortfall. Remember that the investment cycle is long for most of the industry so by the time this trend appears it will be late. Conclusion - Oil prices will eventually rise and when they do it will not be gradual.
- E&P Service companies are increasingly becoming essential players not only for new exploration but for productivity gains in existing base. With the HAL/BHI deal in jeopardy SLB is poised to benefit as the premier global service company with the lowest cost and highest margin potential. The high installed base will only help them expand on their broader product offering including Cameron's leading product line. Conclusion; The E&P services space is and will become critical to integrated' s and State sponsored oil companies. They are becoming the big data technology providers for these. SLB is the most global E&P service company.
- Strong fundamentals in light of a very severe cycle; Unlike most Energy companies SLB is one of the few remaining companies with relatively strong financial position. It has a net Debt/EBITDA position of 0.5X which means it has a strong balance sheet even if EBITDA falls in 2016 as it's widely expected. Despite a 35%+ revenue drop, It has industry leading Operating margin of 15% and ROA of 5% which speaks of its proficient operational capabilities. On valuation it has a Price/FCF of 15X vs 30+ for most peers. Even with the expected cash flow deterioration this metric is bound to remain robust. P/E is at 30-45 times depending on ttm vs fwd. High but again lower than most peers. Significant drivers of EPS contraction are non-cash impairments so I wouldn't only look at this metric to judge value. EV/EBITDA is ~10X , again likely to creep up on further weakness but significantly better than the outlook for peers. Conclusion; The stock price could go lower after Q1, however if your time horizon goes beyond 2016, this is not a bad entry point for a world class service company with essential global offering.
Disclosure: I am/we are long SLB.