Shares of Schlumberger Limited SLB slipped to a 52-week low of $59.25 during the trading session on Sep 7. However, the stock recovered marginally to eventually close at $59.70, which is notably just 0.6% up from the stock’s 3-year low level of $59.32. Shares of the company closed at $59.98 yesterday, up around 0.4% from the closing price as of Sep 7.
Let’s have a detailed view on the overall picture of the company to uncover the reason behind the stock’s dismal run on the bourses. Also, let’s analyze whether it’s time to drop the shares of Schlumberger from your portfolio or retain it amid other tailwinds.
Permian Pipeline Crunch is a Spoiler
With production growth on a tear in the Permian Basin, pipelines of the region are under immense pressure. In fact, expanding volumes have begun to outstrip the pipeline takeaway capacity of the Permian Basin, pushing the regional prices to a four-year low. A glut of crude waiting to be transported out of the Permian play has forced operators to accept steep discounts on their produce. Hence, despite the crude rally, the Permian dilemma has started affecting the performance of the energy producers operating in the region. Prospects of the hydraulic fracturing market also do not look bright, with producers suspending the completion of wells.
These challenges are forcing producers to slow down production as well as investment levels. In turn, the slowdown in drilling activities is hurting the oilfield services companies like Schlumberger. In fact, just about a week ago, the company warned its shareholders that the lack of takeaway capacity might reduce Permian production, hampering the business of the firm.
While there are several Permian pipeline projects lined up, it will definitely take a year or more for everything to settle in place. Many producers have now become reluctant to increase their spending levels until the takeaway problem gets sorted. Reducing spending and lower production activities in the prolific Permian are likely to hit the oilfield services players once again.
But will the company’s international exposure neutralize the Permian woes to some extent?
Better-Positioned to Deal With Transport Bottleneck
Schlumberger is the largest oilfield services player in the world, with its presence in every energy market across the world. While many of the oilfield services companies are likely to get hugely hit by the infrastructural bottleneck in Permian, we believe Schlumberger is better equipped to withstand the crisis.
Schlumberger has relatively lesser exposure to the U.S. shale plays compared with peers including Halliburton Company HAL and Baker Hughes BHGE, a GE Company, among others. Importantly, Schlumberger derives majority of its revenues from international operations ranging from Asia to Africa.
We appreciate the company’s greater reliance on the lucrative overseas market. Being the leading provider of technology for complex oilfield projects, Schlumberger is better positioned than most peers to take up new offshore projects in the shallow water basins outside North America. With drilling activities gradually ramping up outside North American markets, the demand for oilfield services in the international markets have started gaining traction.
Meaningful R&D investments in the company’s integrated drilling business are expected to drive its international operations. Moreover, Schlumberger’s Production Management business positions it to gain high returns in the years to come.
Hence, with a greater presence and reliance in the foreign markets, Schlumberger will be able to better withstand the slowdown in North American activities
Financial Strength Bodes Well
With a market capitalization of more than $82 billion, the company displays strong financials and is committed to investor-friendly moves. As of Jun 30, 2018, it had more than $3 billion in cash and short-term investments, and $13.8 in long-term debt, representing a debt-to-capitalization ratio of 27.3%. Evidently, the leverage metrics are quite impressive. Further, the interest coverage ratios are quite solid, being more than 3.
The firm has a strong commitment of returning back cash to its shareholders through dividend payments and stock repurchases. Over the past 15 years, Schlumberger has been paying higher dividend yield than the collective yield of the stocks belonging to the industry. A dividend yield of more than 3.3%, outperforming the industry’s yield of 2.3%, is generous enough to entice its investors. Also, through second-quarter 2018, the firm bought back 1.5 million shares of its common stock.
While Schlumberger is currently being hit by pipeline constraints in Permian, the company’s wider international presence and healthy balance sheet still give its shareholders reasons to retain the stock based on its positive future prospects. The company’s earnings ESP is expected to increase 6% over the next five years. Evidently, Schlumberger currently carries a Zacks Rank #3 (Hold).
Meanwhile, investors interested in the same industry can consider Subsea 7 SA SUBCY, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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Halliburton Company (HAL) : Free Stock Analysis Report
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Schlumberger Limited (SLB) : Free Stock Analysis Report
Baker Hughes, a GE company (BHGE) : Free Stock Analysis Report
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