Short term, oil and gas may still have legs thanks to a turnaround in government policy, but companies within the sector will only experience lower sales and profit, and eventually become uneconomical.
Schlumberger (SLB, Financial) is the world's leading provider of technology for drilling, production and processing to the oil and gas industry. Yet, it’s entire future is in doubt. Investors have seen the deterioration in its business since 2008 as the company’s margins have shrunk by 57%. After a strong rebound from 2008 to 2014, the market cap has declined by 47%. And, even if it does return to profitability this year and next, the stock would be priced at approximately 30 times earnings.
The company’s 3.35% dividend may entice some investors, and it might increase over time as oil prices rise, but the world is going to clean energy, and the rising yield will not offset declines in the stock price.
Schlumberger has spent more on R&D than all its service company peers combined and more than all the oil majors. That’s not a good thing to do in a dying industry -- throw good money after bad in a dismal industry for a decade. Imagine if Warren Buffett did that with Berkshire Hathaway instead of investing profits into other vehicles?
Schlumberger’s Production Management business is a hidden gem within the firm and should generate high returns on capital for years to come. But many believe that the lack of focus on U.S. shale will hit its revenue growth. Last year when General Electric completed its buyout of BakerHughes, it created the second-largest oilfield service provider, pulling even closer to Schlumberger’s leadership position.
The “broad-based recovery in the international markets” that CEO Paul Kibbsguaard says “has now finally started,” and which looks to be helping the company recover sequential revenue growth in almost all geographic markets and product lines, may not last as long as analyst think. Schlumberger may look silly cheap, and it may survive another 20, 30 or 50 years, but the $83 billion investors are paying for the company right now makes it pretty expensive. More importantly, it’s probably not going to able to pivot into something else quick enough to justify investment.
Money managers David Rolfe (Trades, Portfolio), David Carlson (Trades, Portfolio), and Arnold Van Den Berg (Trades, Portfolio) have between 3% to 5% of their AUM in Schlumberger. They may be trading for peak oil short term, but long term these positions will likely be sold out.
Disclosure: I am not long/short any stock mentioned in this article.
