Schlumberger Revised To $105, Still Well-Positioned To Weather A Downturn

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Schlumberger (NYSE:SLB), the largest oilfield services provider, has seen its stock decline by about 17% over the last 6 months, impacted by plummeting crude oil prices. While we tend to agree that the company faces some challenges in the form of a weaker near-term outlook for upstream capital spending, prompting us to reduce our price estimate from $128 per share to about $105, we believe that the stock is currently oversold. Schlumberger is perhaps the best positioned to weather an industry downturn among large oilfield services companies, given its lower exposure to the volatile U.S. shale markets and also due to its broad technological and geographic footprint. In this note, we take a brief look at our long term investment thesis for Schlumberger.

Our new $105 price estimate still represents a 20% upside from the current market price.

See Our Full Analysis For Oilfield Service Companies HalliburtonSchlumberger |Baker Hughes

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Schlumberger Likely To Be Less Sensitive To Upstream Spending Dip

Crude oil prices have declined by over 35% since mid-June, testing the cash flows and reducing capital spending outlooks for oil and gas companies. According to Barclays Capital, the current crude oil price decline has erased over $50 billion in cash flow for oil firms. While most oil and gas players have yet to provide their capital expenditure budgets for 2015, some companies that have provided guidance – such as ConocoPhillips (NYSE:COP) and Malaysia’s Petronas – indicate that they will scale back.

Activity directed towards shale and tight oil plays is likely to take the biggest cut, given the higher marginal production costs and shorter investment planning cycles. However, we think that Schlumberger is likely to be the least affected by this among the big services companies. For instance, Schlumberger derives less than a third of its revenues from North America and its revenue exposure to pressure pumping – a largely shale directed service – stands at just about 15% (FY 2013) compared to over 30% for Halliburton (NYSE:HAL). [1] Additionally, the company derives a meaningful portion of revenues from projects such as ultra-deepwater exploration and mature plays, which are typically undertaken by larger and more cash-rich oil and gas companies that have long capex planning horizons. We do not expect to see a large decline in contracting activity from these projects, although customers are likely to have better bargaining leverage in contract negotiations and extensions.

Long-Term Investment Thesis Remains Solid

We believe that the long-term fundamentals of the oilfield services sector remain robust.While oil prices are inherently volatile, leading to uneven cash flows for upstream projects and uncertainty in the services industry, we believe that prices are likely to recover in the medium term, on the back of supply-side adjustments and eventual demand growth. In a low oil pricing environment, companies are more likely to defer investment plans and spending, rather than cancel them outright. More importantly, hydrocarbon production is becoming increasingly expensive with the gradual decline in easily accessible conventional land and shallow waters reserves. Exploration and production activity is moving to more complex and challenging frontiers, and oilfield services companies are playing an increasingly crucial role in the upstream value chain, given that they provide the technology and services to help E&P firms undertake complex, high-risk projects. This should eventually allow oilfield services companies to capture greater value from an upside in oil prices, improving shareholder returns.

Key Changes To Our Valuation Model

  • A lower outlook for the rotary rig count in 2015 across geographic divisions.
  • Slightly lower revenue per rig forecasts.
  • Slightly lower EBITDA margins forecasts.

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Notes:
  1. Oil Field Services Fact book – Conference Edition 2014, Howard Weil []