Schlumberger Can Improve Its Performance In a Difficult Oil Environment

With uncertainty prevailing in the oil market, Schlumberger (SLB, Financial) is going through tough times. The world’s largest oil field service provider reported its fourth-quarter result in January, which was quite decent. In spite of this, the company has been taking drastic measures lately, which reflects the underlying weakness and the effect of the falling crude. Led by these headwinds, the stock touched its 52-week low in January with uncertainty prevailing over its future price movements.

Improving despite challenges

During the previous quarter, its revenue rose 6.2% from a year ago period to $12.6 billion, while earnings increased to 0.4% year over year to $1.5 a share. Even as its profit growth was affected by excessive oil inventory and tepid demand, the company expects its 2015 revenue to be under pressure because of the significant drop in oil prices. To compensate for this, it has decided to cut 9000 jobs, which constitutes around 7% of its work force. This is a significant reduction and should greatly enhance its bottom line in the coming months.

But it seems that, this move might not be sufficient to offset the challenges ahead. Consequently it has reduced around 400 land rigs in the U.S compared to its October peak, and the management foresees the same trend to continue in the first quarter as well.

What next?

However, in spite of these efforts, the company still has various headwinds in both the domestic and international market. It expects to further curtail its spending in some parts of Middle East and Latin America. The company had a strong performance in Saudi Arabia, Oman, Kuwait, and UAE, while it still continues to struggle in regions such as Iraq, Malaysia, Indonesia, and Vietnam. Similar situations prevail in Europe, CIS, Africa and Russia.

Although it is taking various initiatives to improve its situation, but, in the near term these challenges will negatively impact its financials. These headwinds will get a further boost from oil companies racing to get the largest market share and deterred from cutting production, causing a surplus in the market, which consequently led the price decline. There seems to be no quick fix for this problem.

However, in the long run, the management is quite positive that the global recovery remains intact and the demand for oil will increase in the coming years. Moreover, considering the global oil production capacity of around 1 million barrels per day in the past years; overall oil market looks relatively stable from a capacity point of view.

As a matter of fact, some positive developments are visible, which could reduce the present oil glut. The reduced spending on exploration and production (E&P) is a significant step in this direction. This was clearly visible in the 2014 results, which reported reduced production capacity in the international markets following a year of flat E&P investment.

Hence we can fairly conclude that such efforts will yield promising gains in the coming years. Additionally, its stock buyback programs also indicate the strength of its fundamentals. During the quarter it bought stocks worth $1.1 billion and is on track to complete its proposed $10 billion buy back with in a period of two and a half years.

Conclusion

The company currently has a trailing P/E of 20.69 but its forward P/E does not look very impressive at 22.79, which again emphasizes the weakness in its earnings growth. In addition, a recent report has showed that, new orders for mining, oil field, and gas field machinery declined 16.6% in February, which is the biggest drop since October. Even its stocks reflect the same picture, which tanked around 30% in the past one year. Therefore in the light of these facts, it seems prudent for investors to avoid this stock for the moment and keep looking for any turnaround in this sector.