Schlumberger (NYSE:SLB) met expectations in its second-quarter earnings report.
The world’s largest oilfield services firm grew both earnings and revenue as exploration and production (E&P) begins its climb from the recent slump in oil prices.
Despite increasing SLB earnings, Schlumberger’s stock still trades near multi-year lows. However, E&P demand has begun to rise in most parts of the world. With profits moving higher, and the need for capacity increasing, SLB stock should finally start to move back toward its 2014 highs.
SLB Earnings Meet Estimates, Revenue Falls Short
The Houston-based E&P firm reported Q2 earnings of 43 cents per share. The company earned 35 cents per share in the same quarter last year. Revenue offered a more mixed picture. Revenues of $8.3 billion showed an 11.3% year-over-year increase. However, Wall Street had expected $8.36 billion.
The market offered a muted, but positive reaction to the SLB earnings report. The stock rose by about 0.5% in morning trading following the announcement. [Ed’s note: SLB stock is trading down half a percent as of this writing.] Although revenue disappointed slightly, the long-term story on SLB earnings looks bright.
SLB Stock Remains in a Slump
SLB trades at about 43% below the stock’s 2014 high. Despite some recovery in oil prices, the stock has yet to see a sustained move higher. SLB stock moved towards $80 per share in January, but subsequently fell as low as $61.02 per share. It came off its lows, and the SLB earnings report has taken the stock above $67 per share.
Overall earnings indicate SLB stock could recover. The current price-to-earnings (PE) ratio of 73.5 falls to about 35 on a forward basis due to earnings. This valuation may look expensive. However, analysts still forecast average profit growth of 61.6% per year for the next five years.
Given the SLB earnings growth, the stock trading at multi-year lows presents an opportunity. E&P stands as the most volatile segment of the oil business. Fear of another oil-price crash could foster a reluctance to bid the stock price higher.
Still, opportunities for growth appear strong, especially in the company’s home North America market. North America now makes up 38% of Schlumberger’s sales. The share stood at 30% one year ago.
Geopolitics Should Help Boost SLB Earnings in the Future
Also, Chairman and CEO Paal Kibsgaard said that a limited ability to increase supply might force more E&P activity in the coming years. Pipeline capacity limits have slowed robust production in the Permian Basin. Also, geopolitical issues such as the return of the sanctions on Iran or turmoil in Venezuela limit the ability of those oil-rich companies to fill supply gaps.
Despite Mr. Kibsgaard pro-Schlumberger bias, he makes an important point. The oil and gas markets will need more of the services Schlumberger sells to drill in the politically stable regions. This should help drive SLB earnings higher in the years to come. It should also benefit peers such as Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI).
SLB earnings may also benefit on the natural gas front. With the American natural gas export market beginning to take off, natural gas production will more than likely remain robust. With so many potential catalysts to keep E&P steady, a slump like the one seen recently probably will probably not occur again for the foreseeable future.
The Bottom Line on SLB Earnings
Between profits and rising demand for E&P services, SLB stock should finally see a sustained move higher in the months and years to come. SLB earnings met estimates as profits and revenue increased. Though revenue missed expectations, SLB stock rose in morning trading.
However, despite rising profits and increased revenues, SLB stock has failed to see a sustained move higher. I think this creates opportunity. A profit growth rate of over 60% should mitigate concerns about a 35 forward PE. Moreover, the Permian Basin needs to increase capacity. Other regions may also require new capacity as geopolitical interests limit the production potential of some areas. Given current energy prices and the continued need for more drilling, it is time for SLB stock to exhibit the same uptrend seen on the revenue and profit fronts.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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