Schlumberger Limited.: How Low Will Earnings Push SLB Stock?

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With oil continuing it’s downward spiral, this upcoming earnings season is shaping up to be a real stinker for energy stocks.

Schlumberger Limited.: How Low Will Earnings Push SLB Stock?The pain will be felt across the board (sans maybe the various downstream/refining stocks), but nowhere will that pain be more prominent than in the companies providing drilling, pumping and other services to exploration and production businesses.

Which brings us to oil services kingpin Schlumberger (SLB).

The question isn’t whether Schlumberger will see a decline in its earnings from a year ago or even last quarter, but just how much of a decline there will be.

The vital piece of information to look for is just how bad the rest of the sector is going to suffer. After all, if SLB is hurting badly, what does that mean for smaller, less established energy stocks?

All in all, Schlumberger’s earnings aren’t going to be pretty. Here’s what investors can expect.

Continued Earnings Decline

While “lower for longer” has been the energy stock rallying cry, no one in the industry thought that things would get this bad. Oil has now touched down to the $30 per barrel mark and some have called for even sub-$10 per barrel crude by the end of the year. That’s thrown energy stocks like SLB for a serious loop.

It’s also hurt on the profit and earnings front.

For Schlumberger, the last few quarters have seen a downtrend in earnings and forward guidance figures. Last quarter, Schlumberger reported earnings of 78 cents per share. That was about half as much as it earned year-over-year. Schlumberger also saw a 33% drop in YoY revenues. This quarter is no exception.

Analysts now expect Schlumberger to earn just 63 cents per share on $7.8 billion in revenue. Again, a pretty hefty decrease vs. a year ago and the prior quarter.

The pain for Schlumberger comes on a variety of fronts. To start, low crude oil and natural gas prices put a hurting on energy producers’ cash flows. There simply isn’t enough money to go around. Capex budgets are slashed and gutted to preserve dividends or simply keep the lights on.

As a result, SLB isn’t providing as much in the way of oil services anymore. And while the company still receives a huge portion of its revenues from state-owned oil companies located overseas, even these firms have begun to cut in the face of $30 oil.

Secondly, in an effort to keep market share, Schlumberger — as well rivals Halliburton (HAL) and Baker Hughes (BHI) —  have aggressively cut prices to retain customers.

Lower prices are OK if you’re snagging more and more customers. But when you’re doing it just to keep the ones you have, that results in lower overall margins, revenues and, ultimately, profits.

Finally, Schlumberger’s fourth quarter usually slows down as winter takes hold. Schlumberger typically offsets some of the decline in drilling and completion activity with higher sales of software, products and other similar oil tech products.

Unfortunately, Schlumberger CEO and Chairman Paal Kibsgaard pretty much nixed this whole idea during last quarter’s conference call and earnings release.

SLB’s Problem Is in the Future

The problem for Schlumberger — as well as many of the oil services firms — isn’t the current earnings report. (Remember, this is a look back at the previous three months.)

We all know it’s going to be bad; and while painful, the previous 90 days actually saw higher oil prices than what we’ve had so far here at the start of the New Year. While it’s anybody’s guess as to where we’ll see crude oil prices at the end of the quarter, the trend is for further declines.

A huge amount of Iranian oil is about to hit the market and Saudi Arabia and the U.S. keep on pumping. Meanwhile, demand for crude oil and natural gas have fallen off the map as China and the mild winter weather have reduced the need for more energy. And let’s not forget the higher dollar and its effect on commodity prices.

At the end of the day, you’re looking for potentially lower crude oil prices in the near term. That won’t be a pretty picture for Schlumberger’s forward-looking guidance or future earnings prospective.

Avoid SLB for Now

So what does this all mean for investors? To put it bluntly, Schlumberger is firmly in the “don’t buy” camp.

The near-term future is far too murky for SLB stock. And that’s not a knock on the company or its vast empire of oil services — Schlumberger is a wonderful company.

The problem is Schlumberger stock is too expensive when looking at next quarter’s estimates taking into account lower oil prices. At the current share for SLB and the 56 cents it’s expected to earn next quarter, you’re looking at a price-earnings ratio of around 112. Even looking at SLB’s future full-year earnings, you’re still paying more than 25 times earnings.

That’s not cheap even for the global kingpin of oil services. Buying today almost ensures a drop in share price over the next quarter or so.

With that in mind, investors are probably better waiting before snagging or adding to their Schlumberger positions. The key will be to see what its guidance numbers are and just how low oil prices go.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2016/01/slb-schlumberger-stock/.

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