Why You Should Consider Schlumberger Stock Over Exxon As Oil Prices Recover

by Trefis Team
Schlumberger Limited
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The stock price for Exxon Mobil (NYSE: XOM), the largest integrated oil and gas company in the U.S., is down by almost 45% since early 2018, driven by significant declines in crude oil prices. In comparison, Schlumberger (NYSE:SLB), the largest oilfield services provider, has seen its stock decline by 75% over the same period. This comes despite the fact that Schlumberger’s revenue growth for the 2017-2019 period stands at about 8%, roughly in line with Exxon’s. Moreover, Schlumberger’s adjusted net margins have also been roughly in line with Exxon’s net margins in recent years. Does that make sense? No, we don’t think so, and believe that Schlumberger is likely a good investment at this juncture compared to Exxon, as oil prices recover steadily. Our dashboard analysis Does Schlumberger’s Sharp Decline Versus Exxon Mobil Make Sense? has the underlying numbers.

How Do The Core Businesses For Exxon And Schlumberger Compare?

Let’s take a look at the core business prospects of the two companies a little more closely. Exxon is an integrated oil and gas company involved in exploring and developing oil & natural gas sources.  The company also refines and markets oil and natural gas products. Exxon’s revenues and profits are largely levered to hydrocarbon prices and this has resulted in its stock dropping by over 35% year-to-date, as oil prices collapsed due to demand shock caused by the coronavirus pandemic and a price war led by Saudi Arabia.

Schlumberger, on the other hand, provides upstream drilling and exploration services required by oil companies, including Exxon, to explore, develop, and service their oil resources. While the stock prices of oil companies, in general, took a big hit through the pandemic, oil field services stocks saw a sharper sell-off as oil and gas companies are expected to scale back on capital investments this year, while potentially holding off on higher-marginal cost projects.

However, oil prices have recovered sharply in recent weeks. WTI crude currently trades at levels of over $32 per barrel, marking an increase of over 150% since late April, driven by the gradual opening up of the U.S. economy and optimism that the coronavirus pandemic can be controlled. Moreover, the Trump Administration has also shown signs that it was working to get OPEC+ to curtail production in order to support oil prices. This is also boosting industry sentiment.

Sure, Exxon stands to benefit more quickly from an improvement in oil prices compared to Schlumberger, which will only see the second-order effects of a rally, as companies eventually rethink capital budgets. However, Schlumberger could be a better play on the recovery given that its stock is down by almost 60% year-to-date. Moreover, Schlumberger’s current P/S multiple looks much more attractive than in the past, as it trades at just about 0.7x trailing revenues, down from about 3x plus multiples seen in recent years. In comparison, Exxon’s multiple has contracted to 0.7x, from historical levels of around 1.3x.

Will the increased virtualization of business impact oil prices in the long-run? View our analysis Oil Prices Don’t Like The New Work From Home

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