Schlumberger’s Stock Tanks Despite Meeting Market Estimates; Plans To Grow Its SPM Division Rapidly In The Next 5-7 Years

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Schlumberger Limited
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In line with the market expectations, Schlumberger (NYSE:SLB), the world’s largest oilfield services company, posted 3Q’17 revenue of $7.91 billion and adjusted earnings of 42 cents on 20th October 2017((Schlumberger Announces Its Third Quarter 2017 Results, 20th October 2017, www.slb.com)). However, despite meeting the consensus estimates, the company’s stock price dropped 2% post the release of the third quarter results, as the market penalized the company for providing a weak outlook for the North American onshore markets. Going forward, Schlumberger expects to grow its SPM investments from a mere product to a full-blown group/division in the next 5-7 years, while its services business will continue to drive its long term value.

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Key Highlights of 3Q’17 Results

  • Similar to the last quarter, a majority of Schlumberger’s revenue growth was driven by the rising activity in its North American onshore markets as the company gained market share in both hydraulic fracturing and the drilling services markets. On the international front, the oilfield contractor witnessed strong improvement in activity in Russia, North Sea, and Asia. However, the activity in the rest of the world remained largely flat.
  • During the quarter, Schlumberger generated cash flows of $1.9 billion from its operations, of which $385 million were utilized to repay its long term debt and around $600 million were spent in capital investments. Further, the company repurchased 1.5 million shares and paid quarterly dividends of $693 million to its shareholders.

Outlook

  • Although Schlumberger expects its North American onshore markets to continue to grow in the coming quarters, the rate of growth is likely to be slower compared to the previous quarters of this year. This is because of the moderating appetite for exploration and production (E&P) investment in the North American markets, as oil and gas companies are now more focused on generating higher financial returns and operating within cash flow, rather than chasing production growth. This is likely to result in a flattening of the US land rig count, which could weigh negatively on Schlumberger’s results.
  • However, the company is seeing positive signs in some of the international markets, as several conventional land and offshore projects are now moving towards the final investment decision (FID) stage. Consequently, the company expects modest growth in EMEA and Latin America, while OPEC Gulf and Russia will continue to drive its growth in the coming quarters.
  • In terms of Schlumberger’s strategy to enter the E&P space through its SPM investments, the management highlighted that the new business is expected to complement its existing services business, which will continue to be its core area of operations. The company believes that its new business will not only help in mitigating the risks associated with its core business, but will also enable it to reduce the overall risk profile of the company.

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