Schlumberger (SLB, Financial) released unimpressive results last quarter. The company did report a marginal 6% growth in revenue this quarter as well as a 7% growth on a year-over-year basis. Still, the results were not up to the mark to attract investors.
The lower oil pricing is having a negative impact on Schlumberger’s financial performance. Due to lower oil prices its performance was majorly hurt in the regions of Europe, CIS and Africa. Still the company is seeing some bright spots in North America, Middle East and Asia. But for the long term, Schlumberger needs to explore ways to be profitable.
It is a tough task for the company as the stock had been continually falling on the exchange and even touched its 52-week low in January which is grave. However, Schlumberger is counting on its global footprint and broad business portfolio to help it perform better in the upcoming quarters even after soft market conditions. Let us have a look.
On the defensive
The company is now in a defensive mode. It is trying to save its skin by focusing on various initiatives to improve profitability. The market is soft, and the company has already lost much market; still it is making some brave moves. The company has reduced around 400 land rigs to improve its margins; it has marginally helped Schlumberger and the management of the company now expects this strategy to continue in the fiscal 2015 as well if oil prices don’t show any near signs of recovering.
Crude oil is a decisive factor for Schlumberger’s growth. As of now falling oil prices are a serious headwind for it. If not rectified, it can cause further damage to the company in the long run. The lower oil prices are putting pressure on the oil companies to maintain their profitability by cutting production and causing a surplus in the market. This can be a solid move by the companies, but this is leading a further decline in oil prices. According to some analysts there is a no quick fix to this headwind. Schlumberger seems to be in trouble.
Optimistic points
On the other hand, the management of the company is optimistic about future oil prices. The prices are low, but from the capacity point of view, the global oil production is relatively stable. So, Schlumberger expects that there will not be much drop in oil prices, and the company will get enough chances to rectify this issue under its camp.
Keeping oil prices in mind, Schlumberger is taking several initiatives to improve its performance. It is reducing its spending on exploration and production in order to boost its margins. This can be further supported by regions which are showing positive growth such as Saudi Arabia, Oman, Kuwait and UAE.
Conclusion
Moving to its fundamentals, the stock surprisingly looks reasonable with a trailing P/E of 20.77 and the forward P/E shows steady earnings growth in the near term. Its profit margin with 11.19% is impressive and can attract investors. As per valuation the stock does look profitable but considering the long-term prospects and declining oil prices I would like to suggest the investors to wait for some concrete signs of stock gaining market share in future. Until then they should see investment in Schlumberger from the sideline.
