EUR 850.00 For Business Accounts Only

Morningstar | SLB Updated Forecasts and Estimates from 01 Apr 2019

Best Idea Schlumberger posted a solid fourth quarter, considering the severe industry headwinds affecting the company's pressure pumping business. Revenue declined 4% sequentially owing to a 12% decline in North America offset by a 1% increase in the international market. Adjusted operating margin slipped to 9% from 10.9% previously, owing chiefly to the North American slowdown along with international project startup costs in the Drilling segment. Our fair value estimate and narrow moat rating remain unchanged for now.

As we've previously noted, the bottleneck in Permian Basin takeaway capacity has caused a slowdown in U.S. shale completions activity, affecting utilization and pricing for pressure pumpers. This completions slowdown accelerated in the fourth quarter. However, the takeaway constraints are still set to be alleviated by the second half of 2019, meaning that these issues are temporary.

Schlumberger management noted that its pressure pumping revenue was down 25% in the fourth quarter. We estimate that pressure pumping (which exists within the Production segment) accounted for about 15% of total company revenue (the levels were not disclosed) and about 40% of North American revenue in the prior quarter. Therefore, the pressure pumping slowdown accounted for nearly all of the North American decline. Additionally, Cameron's North American sales declined 8%, owing to the same cause as the pressure pumping slowdown. Our fair value estimate and narrow moat rating remain unchanged.

Management reiterated its optimistic guidance for international markets in 2019, suggesting that international revenue will grow at least mid to high single digits owing to higher overall activity levels and expenditure (we forecast 9% international growth in 2019). Furthermore, North American revenue should rebound (particularly in the latter half of the year) owing to the pressure pumping recovery.

We are particularly encouraged by the company's ongoing success in its integrated initiatives, such as Integrated Drilling Services and Schlumberger Production Management. In 2019 and 2020, this will have a particularly strong impact on the Drilling segment, where around 50% of total revenue is now covered by integrated performance-based contracts of some kind. Management has reported significant efficiency gains achieved on key contracts as they've ramped up in the last few quarters (including the largest one with Aramco). On performance-based contracts, these efficiency gains should translate into strong profitability for the duration of the contract. Additionally, because efficiency gains create value for the customer, they are likely to lead to market share gains in coming years.

For more on our bullish thesis on Schlumberger, please see our January 2019 report: "Oilfield Services Stocks Haven't Been This Cheap in Over a Decade."