Why Schlumberger’s Stock Continues To Underperform

The oil market has seen an upturn of sorts over this year, with the global rig count rising by close to 10% year-over-year as of the end of April, with Brent crude oil prices also rising by around 15% year-to-date. However, Schlumberger   (NYSE:SLB), the largest oilfield services provider, has seen its stock underperform so far this year. In this note, we take a look at some of the factors that likely contributed to this underperformance. View our interactive dashboard analysis outlining our expectations for the company for the full year.

Some Headwinds Remain In U.S. And International Markets

While the profitability of U.S. oil and gas companies has improved over the last few quarters, companies have been more focused on generating higher financial returns and operating within their available cash flows, rather than going for meaningful production growth. Moreover, several operators in the U.S. entered into derivatives contracts in late 2017 to ensure stability in their price realizations. However, now that oil prices have risen to more than $70 a barrel, many of them have not been able to fully take advantage of the rally. For pressure pumping – which remains one of the most important revenue generators in the U.S. land market – Schlumberger’s net capacity additions have been lower than initially planned due to lower utilization, inefficiencies, and softer pricing. The U.S. market as a whole is expected to add 3.3 million HP this year, per consultancy Rystad Energy.

Schlumberger’s business in overseas markets has also faced some pressure. For instance, during Q1 2018, the company’s performance was dragged down primarily by Latin America, where revenue fell by 16% sequentially, amid lower fracking intensity in Argentina, reduced activity in Brazil due to mobilizations, and declines in activity in Venezuela. Revenues from the Europe, CIS and Africa region also declined sequentially due to seasonality.

Operators Are Not Revising E&P Spending Despite Recent Gains

Although Brent crude prices have increased to over $75 per barrel, with clear signs that the oil market has been tightening, Schlumberger noted during its Q1 conference call that there hasn’t been an upward revision to global exploration and production spending for 2018. Moreover, there appears to be continued pricing pressure as the company said that prices for standalone products and services have yet to see an inflection point, noting that there is still sufficient capacity in the market. Moreover, Schlumberger’s revenues have actually declined significantly over the last few years, falling from~$48 billion in 2014 to a projected $34 billion this year, meaning that it could be a while before things return to historical levels.

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