Schlumberger Versus Halliburton: Who Has A Better Financial Position?

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Persistently weak commodity prices have not only weighed heavily on the profitability of oilfield services companies, but have also led to a deterioration in their cash flows. Due to this, these companies have been forced to raise large amounts of debt to fund their capital expenditure, dividend payments, and day-to-day operations. However, the rising debt levels, or leverage, of these oilfield contractors is a cause of concern for investors. Hence, in this article we discuss the impact of the commodity slump on the leverage and solvency of the world’s two largest oilfield services companies, Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL), and analyze which of the two is financially more sound.

To begin with, we look at the debt-to-total capital ratio of the two companies. This ratio indicates the proportion of debt in a company’s total capital structure. Due to the interest shield provided by debt obligations, it is beneficial for a company to have a fair amount of debt on its books. However, having an excessive amount of debt, in an environment where the cash flows are diminishing, is bound to cause uncertainty about the company’s ability to repay its debt obligations. Such has been the case with both Schlumberger and Halliburton, who have seen a sudden rise in their debt levels, and, in turn, their debt-to-total capital ratio over the last few quarters.

For instance, Schumberger, the world’s largest oilfield contractor, had long-term debt of $7.5 billion and a debt-to-total capital ratio of around 16% at the end of the third quarter of 2015. However, this ratio has almost doubled to roughly 30%, as the company’s long-term debt rose to $18.3 billion at the end of the second quarter of 2016. Similarly, Halliburton’s leverage, which was closer to 32% at the end of the third quarter of 2015, grew to more than 55% at the end of the latest quarter of 2016. While both the companies have seen a significant jump in their long-term obligations over the last two years, Schlumberger has a lower amount of leverage compared to Halliburton. This implies that Schlumberger still has room to raise more debt, if required, at better prices than Halliburton, to weather the ongoing commodity downcycle.
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Secondly, we analyze the net debt-to-EBITDA ratio, which depicts the the number of years that a company would require to repay its long term debt (excluding cash and cash equivalents) at the current rate of profits. Due to weakening cash flows, Schlumberger’s net debt (debt minus cash) has increased drastically from $4.3 billion in 3Q’15 to $15.3 billion in 2Q’16, causing a steep rise in its net debt-to-EBITDA ratio. An increase in this ratio implies that the company’s ability to meet its long-term debt obligations has declined over time. However, in comparison, Halliburton’s net debt-to-EBITDA ratio has become negative over the last two quarters, which means that the company has been making losses at the EBITDA level and it will be extremely difficult for it to meet its long-term debt obligations.

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Finally, we discuss the interest coverage ratio which shows a company’s ability to fulfill its interest obligations. Since long-term debt obligations of both Schlumberger and Halliburton have grown notably over the last two years, their interest obligations have also gone up sizeably. With lower operating profits (EBITDA) and higher interest expense, Schlumberger’s interest coverage ratio has declined, from 27.50 in the September quarter of 2015 to 8.87 in the June quarter of 2016, indicating a reduction in its ability to meet its interest requirements. On the other hand, the metric has not only declined for Halliburton, but has turned negative over the last six months, creating a negative perception about its ability to meet its fixed obligations.

SLB-Q&A-2-2

Thus, based on the above discussed ratios, we believe that while the commodity downturn has severely impacted the financial position of both the oilfield contractors, Schlumberger is still delivering profits (adjusted) and has not yet crossed the threshold in terms of leverage and solvency ratios, when compared to Halliburton. Hence, as of today, Schlumberger holds a stronger financial position than Halliburton.

Also read our article – Schlumberger Versus Halliburton: Who Is Delivering Better Returns? – to learn about the returns generated by Schlumberger and Halliburton.

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