Reports 4Q 2019 results on Friday, January 17 for the open
Income expectation: $ 8.17 billion
EPS expectation: $ 0.37
When Schlumberger (NYSE 🙂 reports its fourth quarter tomorrow, investors will seek strong justification for the 30% rally of the share since October that has stopped a multi-year dive.
The shares fell by more than 3% on Wednesday and closed at $ 38.33, giving up part of the past quarter's earnings while continuing their downward decline.
Schlumberger Weekly Price Chart
Despite the higher rise in the last quarter, the company has been stuck in recession since mid-2014. In today's environment where energy prices remain under pressure, the world's largest oil and gas producers have hesitated to increase spending, thus hampering the company's efforts to really recover.
Schlumberger is active in more than 120 countries and supplies the most comprehensive range of products and services in the industry, from exploration to production. The quarterly results of this colossus indeed serve as a bellwether for the energy sector in view of the range in regions and insight into the plans of drills. Yet & # 39; the world's largest provider of oil services has seen its stock fall by more than 50% over the past five years.
The last proof of this tough business environment came in October when Schlumberger reported his largest net quarterly loss in at least a decade after the company took $ 12.7 billion in pre-tax taxes. This was the first since Chief Executive Officer Olivier Le Peuch took the lead in August and represented the strategy of the new CEO to clear up the goodwill that he could not justify.
Most costs – $ 8.8 billion – include amortization of goodwill, the intangible assets on a corporate balance sheet that usually arise after the acquisition of another company. Schlumberger made his 2010 purchase from Smith International Inc. and the acquisition of Cameron International Corp. in 2016, as well as the subsequent deterioration of market conditions.
5% dividend yield
After the drastic price correction, the shares looked cheap and some investors thought the bottom had been reached, especially with the dividend yield of 5% in this low-rate environment. Despite the optimism that Schlumberger's share has supported in the past quarter, we see no growth catalyst on the horizon. Oil prices are falling again and American producers are not willing to spend.
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. Last year, the company told analysts that it is expected that oil production from North American slate basins will slow down, as explorers lower spending after the recent wave of mergers and acquisitions and the loss of growth. In the third quarter, Schlumberger's North American sales decreased by 11% compared to the same period a year earlier, while international growth increased by 8%.
Schlumberger's company outside of the US and Canada generates most of its income. The oilfield service provider predicts single-digit growth for 2019, with explorers planned to boost spending by as much as 8%.
The profit potential for Schlumberger internationally is about four times that of its competitors when it comes to 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 situation to change quickly and therefore do not see an upward price for Schlumberger shares in the short term.
Bottom Line
The shares 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 trade in this right now.
