Crude oil prices have had an excellent bull run for the past few quarters, but the situation might change. The shortage of natural gas and coal has resulted in an increasing demand for crude oil, but supply is beginning to catch up with demand, and rising Covid-19 cases in Europe could result in waning demand and possible oversupply. Oil and gas companies have made hay during this bull run and so have oil services players, as most of these stocks were trading close to their 52-week highs as of late.
In this article, we will take a look at Schlumberger Ltd (SLB, Financial), one of the largest oil services companies in the world that works in a broad spectrum of areas such as pinpointing of oil reserves (both on-shore and offshore), borehole drilling, pumping and monitoring of oil flow, precise determination of the depth and extent of oil and gas pockets; and the rehabilitation of old or discontinued wells. Does the stock have more room to run, or is the bull market reaching an end for oilfield services?
Company overview
Schlumberger is one of the world's largest companies that assists oil explorers in mapping underground pockets of oil and drilling new wells. It offers a wide variety of services including reservoir interpretation and data processing, open and cased-hole, slickline services, exploration, production pressure, flow-rate measurement services, integrated production systems, information management, IT infrastructure services and various other kinds of consultancy services.
It is also known to manufacture land drilling rigs, drilling fluid systems, fluid systems, and specialty equipment, production technology solutions, engineered managed pressure and underbalanced drilling solutions and various other equipment related to the oil and gas industry.
It is one of the older oil and gas service providers, having been founded in 1926. Schlumberger has its headquarters in Houston, Texas.
Earnings recovery
Schlumberger recently reported an upsurge in both revenues and profitability, boosted by higher demand for its services and equipment as producers capitalize on a rebound in crude prices.
On the back of vaccine-fueled demand recovery, global oil prices have risen nearly 64% since the beginning of 2021 to more than $85 per barrel. According to Baker Hughes data, the global rig count was 1,448 at the end of the third quarter, up from 1,019 a year earlier. According to Schlumberger CEO Olivier Le Peuch, the industry's macro fundamentals have visibly reinforced in 2021, particularly in recent weeks, with demand recovery, oil and gas product prices at recent highs, low inventory levels and encouraging trends in pandemic containment efforts.
Among its peer group, Schlumberger has the most exposure to international activity, accounting for roughly 80% of sales outside the United States and Canada. As publicly traded U.S. oil surveyors continue to demonstrate austerity through restrained output growth, the largest oilfield contractors have shifted their focus to more international work. The rising demand in non-U.S. markets is expected to be a major growth driver for the company, although it does face rising input and raw material costs given the inflationary environment.
Digital solutions with AVEVA
Schlumberger and AVEVA recently announced an agreement to incorporate edge, artificial intelligence and digital cloud solutions to help operators in improving oil and gas production. The companies will cooperate to improve sound site efficiency and implementation by streamlining how energy operators acquire, process and act on field data.
The collaboration's primary focus will be on uniting edge systems to applications in the DELFI cognitive E&P environment to enhance equipment health and performance. Furthermore, the collaboration will bring both companies' IoT and cloud proficiencies to market, including the AVEVA PI System's data managing platform capabilities, as well as Schlumberger's domain expertise and analytics capabilities offered by Agora edge AI and IoT solutions and the DELFI environment.
According to Rajeev Sonthalia, Schlumberger's president of Digital and Integration, this partnership will bring both the company's edge and cloud solutions with the AVEVA PI SystemTM to liberate access to data seamlessly, accelerating insights and action. On the other hand, Andrew McCloskey, Chief Technology Officer of AVEVA, said that recent macroeconomic events had highlighted the need for agility across all industries. And therefore, the collaboration with Schlumberger will increase operational agility and engineering efficiency, as well as enable faster delivery of new products and services to improve asset and operational performance. In addition, the companies intend to collaborate on technology integrations, sales and service support and go-to-market activities.
Financial performance and valuation
Schlumberger has benefited from the spike in oil prices and its stock grew by 57% in the past 12 months. Even in the company’s most recent results, Schlumberger reported a top-line of $5.85 billion for the quarter ended Sept. 30, 2021, which implies 11.20% growth as compared to the $5.26 billion reported in the corresponding quarter of the previous year.
Barring the Middle East and Asia market, which underperformed expectations, the revenue performance was fairly decent. These revenues translated into a gross margin of 16.85% and an operating margin of 13.08% which was higher than that in the same quarter of last year. The company's adjusted earnings per share of 36 cents were above analyst expectations and it generated $1.07 billion in the form of operating cash flows. Schlumberger’s management has been optimistic and expects the company to make the most out of the exceptional growth cycle.
In terms of valuation, Schlumberger is trading at an enterprise-value-to-revenue multiple of 2.58 and a price-earnings ratio of 27.43, both of which appear to be fairly valued. Overall, given the bullish outlook for oil exploration, I think this stock could still be in for further gains, even if oil prices are beginning to stagnate again.
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