Earnings season is here once again. And unfortunately for the energy patch, it promises to be a pretty dour one indeed. Oil continues to plunge to new multi-year lows — currently around $46 per barrel. With this round of earnings reports, we are finally going to see how badly the price decline in oil has affected various energy stocks.
First up is oil service stock Schlumberger Limited. (SLB).
SLB is the largest oilfield services firm and one of the leading indicators of global drilling activity. As such, it’s considered one of the bellwethers in the energy sector. As goes Schlumberger, so goes the rest of oil patch.
For investors, following and understanding SLB’s earnings is important even if you don’t own the stock. Here’s what to expect when Schlumberger reports on Thursday.
The Good News for SLB Stock
Over the last three months, SLB stock has plunged roughly 13%. That drop has mirrored the price decline in crude oil as a series of factors has continued to push up supplies while dwindling demand. SLB stock reports earnings this Thursday, giving investors their first glimpse of just how badly oil prices are hurting Schlumberger.
The good news is that SLB should actually see a slight uptick in adjusted earnings growth for the quarter. Remember, the beginning of the quarter was back in October when oil prices were a bit more robust. In that time, expanding pressure pumping, well completion and other services in Schlumberger’s North American and Asia-Pacific business lines were actually doing quite well.
Additionally, a recent acquisition to expand its presence in artificial and rod-lifts will also contribute to increased earnings and revenue at SLB. As will market share gains for drilling services in the Gulf of Mexico.
All in all, SLB should report a fairly decent quarter based on the previous conditions in the energy patch. Analysts expect SLB to report $1.46 in earnings per share on about $12.7 billion in revenues. That’s year-over-year growth of 8% and 7%, respectively — not too shabby for such a large energy organization.
The only real downside to its earnings should be a pretax write-down of $800 million as it continues to reduce the size of its WesternGeco marine seismic fleet business.
But the earnings aren’t the issue.
The Bad News for SLB Stock
Here’s where it gets a tad bit cloudy for SLB.
The problem is going to be its outlook for the year ahead. With Brent crude down to under $50 per barrel, demand for drilling services is falling by the wayside. Understandably, the small-fry E&P shale producers would be cutting spending in this environment, but even the bigger firms are betting on relatively low prices for at least the year ahead.
For example, mega producer ConocoPhillips (COP) cut its capital expediture budget by 20% for 2015 — even deferring spending on North American unconventional shale plays. Investment ratings service Moody’s estimates that North America could see a 30% to 40% decline in overall CAPEX spending.
And while SLB caters to all energy firms, these major players are its primary bread-n-butter. The capex spending cuts and drilling reductions will weigh on SLB’s revenues. As far as its margins are concerned, producers will more likely have the upper hand in contract negotiations and extensions in the new environment, which will put pressure on Schlumberger’s profit margins.
Based on these assumptions, analysts are expecting SLB to see a 1% decline its revenue for all of 2015 as well as 7% decrease in earnings per share. However, the pain could get worse if conditions in the energy patch continue to slide. Some analysts have even begun using $20 per barrel in their analysis.
Prices that low would certainly put the hurt on SLB and its profits.
SLB Stock — A Potential Buy Later On
As one of the first major oil stocks set to report, Schlumberger has the distinction of setting up the sector for the rest of the earnings season. I suspect that much of the energy patch will report similar findings — slight upticks in growth followed by cloudy outlooks.
SLB stock could see more declines when it reports and over the rest of the year as the energy sector malaise continues. It all depends on just what oil does and how long its stays at current prices.
Under that scenario, SLB remain holds as this plays out — as does much of the energy sector. Schlumberger is a wonder company and one of the biggest/best in the oil services industry. I have no doubt that SLB will weather this storm. The only question is just how bad things could get in the oil patch and how far it could fall in the near term.
If investors have a longer timeline, they could use any real dips to dollar cost average a position lower or begin creating position in SLB stock.
As of this writing, Aaron Levitt held a position in the Vanguard Energy ETF (VDE), which holds both SLB & COP stock.
