* Reports 3Q 2019 results on Friday, October 18 before the open
* Income expectation: $ 8.52 billion
* EPS expectation: $ 0.41
Schlumberger Shares (NYSE :), & # 39; the world's largest provider of oil services, have been in a deep crisis for a long time. In anticipation of the 3Q of the company on Friday, we look at the cause and what awaits us.
In the current deteriorating macro environment, the world's largest producers have been reluctant to increase spending, thereby stifling the company's efforts to recover from the recession in which it has been stuck since mid-2014.
Schlumberger, which is active in more than 120 countries and supplies the most extensive range of products and services, from exploration to production, has seen its stock fall by more than 45% in the past year. Trading at $ 31.95 at the end of Wednesday, it has fallen more than 65% in the past five years.
This major correction has made the stock relatively cheap. His forward price-to-profit multiple of 17.37 is almost the lowest in the past five years, while his 6.1% dividend yield looks attractive in this low-rate environment.
These multiples seem attractive, but with no growth catalyst in the short term, investors have no incentive to become enthusiastic about oil service companies.
Delays investment in oil and gas
Under pressure from shareholders, exploration and production companies keep spending under control and return most of their free cash flow to shareholders in the form of dividends and share buybacks.
Schlumberger himself does not shy away from admitting that reality. In the last conference call in July, the company told analysts that it is expected that oil production from North American shale basins will slow down, as explorers lower spending after the recent wave of mergers and acquisitions and the growth of growth.
According to Schlumberger, spending among producers in North America is likely to fall by 10% this year – and the only other way the company can increase sales is through its international operations.
Schlumberger's company outside of the US and Canada generates most of its income. The company predicts single-digit growth for 2019, with explorers looking to increase spending by as much as 8%. The profit potential for Schlumberger international is about four times as large as that of its competitors, given its larger market share and operating margin.
But gambling on its global growth is also risky. Many large oil-producing countries are in pain and keep their stocks under control because of the fear of global supplies. We do not expect that this situation will change quickly and therefore see no short-term benefit for the Schulmberger shares.
In his call to tomorrow's analysts, the most important thing investors should focus on is how much more capital spending cuts Schulmberger is willing to do to protect his annual dividend of $ 2 per share.
Bottom Line
Stocks of oil service companies have become cheaper after a steep decline in the last five years. But despite their more attractive valuations, we don't think it's time to take their shares. In this uncertain global economic and geopolitical environment, oil prices may not be sustainably higher. It would be better for investors not to step into this trade right now.
