What’s Driving Our $44 Price Estimate For Schlumberger?

We have reduced our Trefis price estimate for Schlumberger  (NYSE:SLB), the largest oilfield services provider, from about $51 per share to around $44 per share. While oil prices have posted some gains this year, the company could see slower revenue growth particularly in  North America, where investors have been calling for oil and gas companies (Schlumberger’s customers) to cut back spending after years of strong investments in shale, working within their cash flows in order to boost shareholder returns. Moreover, it’s unlikely that pricing and margins will return to levels seen pre-2014. Below, we take a look at some of the trends driving our price estimate for the company.

View our interactive dashboard analysis on Why We Cut Our Price Estimate For Schlumberger. You can modify key drivers to arrive at your own forecasts for the company’s revenues, EPS, and valuation.

Reservoir Characterization

• The Reservoir Characterization segment provides technologies used in finding and defining hydrocarbon resources and accounted for about 32% of revenue in 2018.
• While revenues declined from around $9.7 billion in 2015 to about $6.4 billion in 2018, we expect them to grow modestly to about $6.9 billion by 2020 as exploration and production activity picks up.

Drilling Business Pricing Slowdown

• The Drilling division provides services for the drilling and positioning of oil and gas wells and accounted for about 29% of revenue in 2018.
• While revenues fell sharply from 2015 to 2018, due to the decline in commodity prices, we expect sales to pick up marginally over 2019 and 2020.
• Growth could be impacted by weaker pricing and the inventory of drilled but uncompleted wells in markets such as the U.S.

Production Operations Could See Slower Growth On U.S. Fracking Pressure

• The Production business provides technologies for the production of oil and gas reservoirs. It accounted for 24% of total revenues in 2018.
• The business has seen sales rise from about $8.6 billion in 2016 to about $12.2 billion in 2018, driven by a recovery in North America where shale based activity picked-up.
• However, we expect slower growth in the near-term, partly due to weaker pricing for fracking services in the U.S. market.

Cameron Segment

• The Cameron segment primarily provides pressure and flow control systems and accounted for about 16% of revenues in 2018.
• We expect its revenues to grow to about $5.4 billion by 2020

• We are valuing the company at about 20x its 2020 EPS.