Image Shown: Shares of Schlumberger NV are on the upswing, though the company’s stock price remains far below levels seen before the COVID-19 pandemic.
By Callum Turcan
On October 22, the oilfield services giant Schlumberger NV (SLB) reported third-quarter 2021 earnings that missed consensus top-line estimates and matched consensus bottom-line estimates. The company’s business continues to recover as oil & gas investment activity is picking up steam around the globe after getting decimated last year in the face of the coronavirus (‘COVID-19’) pandemic. Looking ahead, Schlumberger expects significant improvement in its mid-cycle financial performance from current levels, aided by major cost structure improvements embarked on last year.
Financial Snapshot
The firm’s GAAP revenues grew by 11% year-over-year due to growth at its ‘Digital & Integration,’ ‘Reservoir Performance,’ ‘Well Construction,’ and ‘Production Systems’ business segments with strong performance seen in both North American and international markets. Schlumberger’s pre-tax operating margin and pre-tax operating income at each of these four segments all posted meaningful improvement last quarter on a year-over-year basis. Its GAAP net income flipped from a loss of just under $0.1 billion in the third quarter of 2020 (in part due to meaningful impairment and other expenses) to a profit of ~$0.55 billion in the third quarter of 2021 as its business recovered.
Schlumberger noted that it generated $1.7 billion in free cash flow during the first nine months of 2021 (the company included ‘APS investments’ and ‘multiclient seismic data capitalized’ as part of its capital expenditure calculations), up from $0.7 billion in the same period last year. The firm spent $0.5 billion covering its dividend obligations and did not repurchase a meaningful amount of its stock during the first nine months of 2021. As of this writing, shares of SLB yield ~1.5%.
At the end of September 2021, Schlumberger had a total debt load of $15.4 billion (inclusive of short-term debt), which was moderately offset by $2.9 billion in cash and cash equivalents on hand. We would prefer Schlumberger focus on improving its balance sheet strength before considering material share buybacks given its sizable net debt load, and so far, that appears to be management’s strategy.
Outlook Update
Looking ahead, Schlumberger is optimistic that oil & gas investment will continue to recover. That in turn is expected to provide a powerful uplift to the company’s financial performance in both the near term and over the long haul.
Schlumberger is targeting a 250-300 basis point expansion in its EBITDA performance in 2021 over 2020 levels and now expects to land in the upper end of that range. That expansion forecast is aided by expectations that Schlumberger’s revenues will come in strongly during the current quarter, allowing the firm to exit 2021 on a high note. Farther out, management sees Schlumberger benefiting from a multiyear recovery in global oil & gas investment levels. Here is what management had to say on the issue during the firm’s latest earnings call (emphasis added, lightly edited):
“The market fundamentals have improved steadily throughout 2021, especially over the last few weeks—with oil and gas prices attaining recent highs, inventories at their lowest levels in recent history, a rebound in demand, and encouraging trends in the pandemic containment efforts. These strengthening industry fundamentals, combined with the actions of OPEC+ and continued capital discipline in North America, have firmly established the prospects of an exceptional multiyear growth cycle ahead…
Now, I would like to close my prepared remarks with our earliest views on 2022. Against the backdrop of the constructive environment I described earlier, our confidence in the onset of an exceptional growth cycle is reinforced. At this early point in the planning cycle, and absent a setback in economic and pandemic recoveries, we anticipate very strong global upstream capital spending growth. This growth will impact all basins, every operating environment, short- and long-cycle activity, and all customer groups.
In North America, we anticipate capital spending growth to increase around 20%, impacting both the onshore and offshore markets. Internationally, growth momentum will strengthen, and early indications point to strong capital spending growth in the low to mid-teens, driven by both short-cycle activity and the onset of multiyear capacity expansion plans.” — Olivier Le Peuch, CEO of Schlumberger
Schlumberger sees itself being capable of obtaining and maintaining mid-cycle non-GAAP adjusted EBITDA margins of around 25%. For reference, its adjusted EBITDA margin stood at 22.2% in the third quarter of 2021, up from 21.3% in the second quarter of 2021 and 19.4% in the third quarter of 2020. Additionally, management sees the firm being able to sustain a double-digit free cash flow margin throughout the business cycle, and we appreciate Schlumberger’s focus on its free cash flow performance. Of course, energy markets will need to cooperate to achieve these targets. Management noted during Schlumberger’s latest earnings call that the pricing environment for oilfield services was rather strong in both North American and international markets, further supporting the company’s outlook and ability to realize its mid-cycle adjusted EBITDA target.
Last year, Schlumberger had to cut more than 21,000 jobs from its business as raw energy resources pricing plummeted, prompting enormous reductions in oil & gas investment around the globe. The situation was dire and Schlumberger needed to aggressively reduce its expenses to stay afloat. Schlumberger is now entering a potential multiyear cycle of rising oil & gas investment on much stronger footing, though again we would like to see the firm improve its balance sheet strength going forward.
As an aside, Schlumberger’s geoenergy business recently conducted a successful pilot project in France. That enabled the firm to secure several commercial contracts in Europe involving its Celsius Energy unit which utilizes geoenergy solutions to provide heating and cooling services for buildings. While a small part of its business, Schlumberger does have some exposure to the green energy space.
Concluding Thoughts
Given the company’s expansive reach in the global energy complex, we viewed Schlumberger’s latest earnings report and guidance as a sign that the space continues to recover. Raw energy resources pricing is quite favorable as of this writing, supporting greater investment towards upstream developments, the kind that involve extracting crude oil and natural gas from the ground. Major improvements in its cost structure during the worst of the COVID-19 pandemic have set Schlumberger up nicely to thrive in the current environment, assuming the trajectory holds.
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Callum Turcan does not own shares in any of the securities mentioned above. Energy Select Sector SPDR Fund ETF (XLE) is included in Valuentum’s simulated Best Ideas Newsletter portfolio. Chevron Corporation (CVX) and ExxonMobil Corporation (XOM) are both included in Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Enterprise Products Partners L.P. (EPD) and Magellan Midstream Partners L.P. (MMP) are both included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Long put options on the SPDR S&P 500 ETF Trust (SPY) with an expiration date of December 31, 2021, and strike price of $412 are included in both Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.