Schlumberger Limited: Consolidating In Response To Consolidation
Contributor since 2011 / 26115 Followers
Summary:
- Schlumberger Limited is a leader in the oil and gas industry but is still affected by industry fluctuations and (secular) challenges.
- Schlumberger’s revenues have fallen recently but showed some recovery as the outlook is stabilizing, and the business shows modest growth.
- Schlumberger has seen a 10% decline in share value but is gradually becoming more appealing following a recent acquisition and a solid financial performance.
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Towards the end of last year, I called Schlumberger Limited (NYSE:SLB) steady with upside, although I still referred to the company as Schlumberger. Fast forwarding half a year in time, shares have lost some 10% of their value as SLB has seen an eventful year so far with the pending acquisition of ChampionX (CHX).
All this looks quite decent from a financial and strategic point of view, with the deal adding more capabilities while promising solid synergies. Given all these trends and the pullback in the share price, I am gradually warming up to SLB, although the long-term concerns on the industry’s fortunes mean that conviction is difficult to find.
A Leader In A Tough Industry
SLB has been a highly regarded oil and gas supplier. In fact, it has been recognized as the industry leader, but that still does not insulate the business from the fortunes of the oil & gas industry.
The business peaked a decade ago, when the U.S. shale boom reached a peak in 2014. Shares traded above the $100 per share mark as production numbers rose, and while the producers (generally) did not make much money, that was not the case for the supplier base.
Shares fell back to the $40 mark pre-pandemic amidst secular headwinds to the E&P sector (although that U.S. oil production actually rose), too aggressive capital allocation decisions, and some ill-advised M&A activities.
The business saw revenues fall from $50 billion in 2014 to $33 billion in 2019, as margins were squeezed as well. Revenues plunged to the $24 billion mark in 2020 as SLB´s clients even dealt with negative oil prices at some point that year.
Revenues even fell another 3% in 2021, although that the company managed to become profitable again. The real recovery came in 2022, when total sales rose some 23% to $28 billion, with growth reported across all four divisions of the business: digital & integration, reservoir performance, well construction, and production systems.
The company posted earnings near $2.40 per share, while net debt was trimmed to $9.3 billion. With 2023 revenues trending at $32-$33 billion and earnings power seen close to $3 per share, while net debt was largely equal to reported EBITDA, appeal was improving a bit.
Trading at a 17 times multiple late last year, the outlook looked quite reasonable, although that ESG headwinds are lasting. That said, there might be a silver lining as well, as the same trends might drive demand for SLB´s (new) services in the future as well, relating to carbon capture and other items.
Having held a tiny long-term position, I failed to have conviction to expand this small position.
Stagnating
Since December, shares of SLB have largely traded in a $45-$55 range, now having moved towards the lower end of the trading range. In January, SLB announced an 18% increase in 2023 sales to $33.1 billion, with adjusted earnings improving by 37% to $2.98 per share, all in line with the estimated numbers in December.
Seeing reasonable momentum into 2024, the company was on the M&A tour in the first half of 2024. By the end of March, the company announced the acquisition of a majority stake in Aker Carbon Capture, paying over 4 billion Norwegian Kroner for an 80% stake in the business.
The big news came early in April as SLB announced an all-stock deal to acquire ChampionX. Investors in ChampionX were granted 0.735 shares in SLB for every share they owned, combined, giving them a 9% stake in SLB.
ChampionX is an over 7,000-employee business which operates in over 60 countries, with the business known for its production chemicals technologies, production and automation technologies, and to a lesser extent, drilling technologies and reservoir chemicals. The idea is to fill in the blanks which the company has in its own product offering, as it strengthens the core of the business and delivers on real efficiencies. These are substantial, with the business targeting $400 million in annual synergies in year three post closing.
Shares of SLB hardly reacted to the deal, which is more than a bolt-on deal, but not as substantial as well. With a market value of around $7 billion, the multiples look quite reasonable, certainly in relation to the sizable synergies being projected.
Expectations Come Down
My mid-April, SLB announced a 13% increase in first quarter sales to $8.7 billion, with adjusted earnings up 19% to $0.75 per share. Net debt ticked up to $8.6 billion, as the nearly 1.5 billion shares outstanding now commanded a $65 billion equity valuation at $45 per share. This grants the business a $73 billion enterprise valuation, ahead of the deal with ChampionX.
Currently, the situation seems quite similar to December, with the company firmly on track to post earnings at, or above $3 per share. This reduces the multiple from 17 times to about 15 times earnings, all while some additional growth from the ChampionX deal could boost earnings a bit further. Given all of this, I feel safe working with a $3 per share number from here, as multiples start to look a lot more compelling.
Moreover, the dividend has recently been hiked by ten percent to $1.10 per annum, although that is never enough of a reason to buy the shares, although that the capital structure allows for these dividends at a 2.5% yield, in combination with some modest buybacks.
Amidst all this, the pullback looks enticing although that some concerns are seen as well, relating to a potential resolution of the conflict in the Middle-East, but also the consolidation spree taking place in the North American production sector, with almost all the majors being involved in multi-billion deals in recent times.
The true long-term picture depends heavily on the industry fortunes and the transition from oil to ESG friendlier production methods, among others. So while SLB is far from a screaming buy and must-have position, I am considering doubling down on further pullbacks from here.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of SLB either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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