What’s Schlumberger’s 2019 Outlook After Q4 Earnings Beat?

by Trefis Team
+26.58%
Upside
40.07
Market
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Trefis
SLB
Schlumberger Limited
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Schlumberger (NYSE:SLB), the largest oilfield services provider, published its Q4 2018 results on Friday, posting revenues that beat market expectations, while earnings were largely in line with street estimates. However, the company’s outlook for 2019 remains somewhat mixed, amid weak oil prices and uncertainty relating to spending by oil and gas operators in North America, which has been a big driver of production growth in recent years. Below, we take a look at what lies ahead for the company in 2019.

Activity Likely To Slow Down In U.S.  

Schlumberger noted that the recent decline in oil prices (down by almost 30% since October) has caused a lot of uncertainty surrounding E&P spending by oil and gas companies for 2019. Activity in the on-shore U.S. market in particular could be impacted, as operators look to better align their investments to their free cash flows, hurting drilling and production activity. U.S. players are likely to focus spending on their sizable inventory of drilled but uncompleted wells rather than drilling new ones, reducing drilling-related spends. Moreover, the higher cost of capital and lower borrowing capacity in an increasing interest rate environment could also hurt spending. That said, things could be better in the international market, where Schlumberger expects to post mid-single-digit growth over the first half of the year, driven by new projects in Africa, Asia, and Latin America.

CapEx Cuts And Potential Upside For Oil

The company has indicated that it was largely sold out of high-end product lines and advanced technologies for the year, and it’s possible that this could enhance pricing power in some of these segments over the year. Schlumberger has indicated that it would be cutting its full-year capital expenditures for 2019 to between $1.5 billion and $1.7 billion, compared to $2.2 billion last year, and indicated that much of its spending is likely to be geared towards these high-end products. Moreover, there is a possibility that oil prices could pick up gradually over the year, driven by supply cuts by Russia and OPEC, and a possibility that the Trump Administration will tighten its sanctions on Iran, constraining its oil exports. Moreover, a potential settlement of the U.S.-China trade dispute could also help bolster prices.

Reducing Price Estimate To $55 Per Share

While we remain bullish on Schlumberger, we have reduced our price estimate for the company to about $55 per share (about 20% ahead of market price), down from $69 per share. This values the company at about 30x its projected 2019 EPS. Key changes to our valuation model include lower long-term growth rates for the drilling, production and reservoir characterization segments. You can view our interactive dashboard analysis on What’s driving our valuation for Schlumberger stock? for more details on the key drivers of the company’s value.

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