We all knew this day was coming. Earnings season for the various energy stocks has started, and oil service giant Schlumberger Limited (NYSE:SLB) is the first up to bat.
Normally, this is a joyous occasion, full of profit beats, dividend increases and a sunny outlook. But when SLB reports on Thursday it’s not going to be pretty.
That’s because this is the first full quarter of the frighteningly low price environment for crude oil.
Investors should be in for a bumpy ride, but just how bad will it be? Will there be any bright spots? And what does it mean for the rest of the energy sector? Here’s InvestorPlace’s preview of SLB’s earnings.
This Time Is Different for SLB Stock
The last time SLB reported earnings, the firm actually didn’t do so bad. Everyone sort of cheered as the firm managed to post better-than-expected numbers. The problem? Earnings are a lagging indicator. Schlumberger reported numbers that only included a slight decrease in the price of oil.
When SLB reports on Thursday, however, we’re going to see the full effects of this low-cost oil environment.
As we’ve seen, the rise in supplies has caused oil prices to fall by the wayside. That has prompted a variety of energy firms to begin cutting CAPEX spending and drilling budgets by some big dollar amounts. Rig counts are down, and drilling activity continues to decline. That’s a problem when you’re one of the largest providers of pressure pumping and other oil services to the sector.
With that in mind, investors should be preparing for one of Schlumberger’s worst quarters in recent history.
Schlumberger Earnings Are Going to Drop — Hard
Wall Street is predicting that Schlumberger will report its steepest decline in earnings in many years. Ultimately, SLB is expected to post a 24% drop in earnings — down to just 92 cents per share. Revenue should also drop about 6.8% to just $10.47 billion. The energy stock’s reduced numbers for the first quarter will also reduce SLB’s full-year 2015 earnings per share by a whopping 40%.
The reason for the predicted drop has everything to do with land drilling in North America. During the first quarter, the number of rigs drilling in North America plunged by 27%. The higher marginal cost of production as well as the shorter planning cycle for shale exploration has allowed producers to quickly react — i.e. stop drilling faster — than other varieties of energy production.
The reduced capex is going to be a source of pain for SLB and other oilfield services firms this earnings season. SLB receives about one-third of its revenues from Canada’s and America’s shale basins. However, the remaining two-thirds of SLB’s sales should help fight back the tide.
Schlumberger is often billed as the “international” oil services company, with operations spanning the globe. In this case, that world-wide focus should help the oil services firm. Some key operational areas — like the Middle East, China and Sub-Saharan Africa — have actually increased during the quarter. Additionally, the downturn in international drilling rig numbers haven’t been as drastic as in North America. Rigs operating international have only fallen by about 5.5% during the first quarter.
The firm’s operational expertise in deepwater and offshore drilling should also provide a boost. Deepwater projects are expensive and long-lived. For the most part, that means once they are started, work will continue until finished. Long term-contracts should continue to help provide SLB with steady earnings and cash flows for quite a while.
But make no mistake, things are still going to be ugly.
Breaking It Down for SLB Stock & the Rest of the Sector
Lower first-quarter earnings for SLB shouldn’t come as a shock. It’s almost a given considering the current environment for oil prices. The key for Schlumberger is going to be its medium-term outlook/guidance and just how robust the international market is.
Each of these two events could lift shares on earnings day — either by beating expectations or showing some signs of longer-term hope. It’s possible, but I wouldn’t count on it. Odds are that SLB stock will sink when it reports.
The real negative thing — and perhaps the real thing to focus on — is going to be North American earnings and the specific guidance tied to that business segment. That’s going to set the tone for the rest of the oil service and energy stocks’ earnings season. Any continued mention of reduced capex or drilling activity is going to going to trickle down the line.
And depending on just how bad things are at SLB, that negativity could translate into much worse things for more North American-focused firms like Halliburton Company (NYSE:HAL) and Basic Energy Services, Inc (NYSE:BAS). It’s almost a guarantee that the rest of the sector will have bad results this quarter and SLB’s numbers will only reinforce that fact.
If you had the inclination to buy SLB stock or any other energy shares while oil prices are keeping them depressed, you may still have plenty of time.
As of this writing, Aaron Levitt was Long the Vanguard Energy ETF (VDE), which holds SLB, HAL & BHI.
