Over the last month or so, a lot of Energy stocks have been under a bit of pressure. The spread between West Texas Intermediate (WTI) and Brent crude widened to more than $10 per barrel early in June, and that was a big factor that put a lot of U.S. oil stocks – including the companies that service the oil industry – under some strain. Schlumberger NV (SLB) is one that has struggled to maintain any kind of bullish momentum since late January, when it temporarily moved above $80 per share. As of this writing, the stock is down more than 15% from that 52-week high, and appears to be rebounding a bit from a low support point. Does that mean it could be a good time to jump into one of the largest oilfield services companies in the world?
There are some pretty reasonable economic arguments to be made for taking a position in a company like SLB. Most analysts, including the U.S. Energy Information Agency (EIA) expect oil demand to remain high through the rest of the year, and the U.S. economy in general is projected to keep seeing healthy growth for the foreseeable future. That is usually a positive for energy demand in general and oil specifically. The “rising tide lifts all boats” logic would certainly suggest that these are bullish conditions for energy and energy-related stocks in general, and most specifically for the largest players in their respective markets. Of course, crude and natural gas prices can be volatile, which also means that an unexpected shift in those commodities would be likely to hit stocks like SLB pretty hard.
That shift could be a result of a number of broader economic concerns; in mid-2014, oil was at all-time highs, but slowing demand in major economies like China, and emerging economies like Russia, India and Brazil all contributed to a rapid, steep decline that saw WTI drop from around $105 per barrel to about $44 by the end of the year. In the current market, trade tensions between the U.S. and its largest trade partners, along with U.S. sanctions against Iran are contributing to uncertainty that is keeping prices above $70 per barrel. The effect in the long run of trade tensions remains unclear, and markets in general abhor anything that stands in the way of business-as-usual. That could be the largest immediate factor preventing SLB or any other energy-related stock from seeing a big near-term push higher.
Fundamental and Value Profile
Schlumberger N.V. provides technology for reservoir characterization, drilling, production and processing to the oil and gas industry. The Company’s segments include Reservoir Characterization Group, Drilling Group, Production Group and Cameron Group. The Reservoir Characterization Group consists of the principal technologies involved in finding and defining hydrocarbon resources. The Drilling Group consists of the principal technologies involved in the drilling and positioning of oil and gas wells. The Production Group consists of the principal technologies involved in the lifetime production of oil and gas reservoirs and includes Well Services, Completions, Artificial Lift, Integrated Production Services (IPS) and Schlumberger Production Management (SPM). The Cameron Group consists of the principal technologies involved in pressure and flow control for drilling and intervention rigs, oil and gas wells and production facilities. SLB has a current market cap of $92.8 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings increasing more than 50%, while sales increased about 13.5%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations. It is also noteworthy that the company’s Net Income is nearly 25% of revenue, which means their profit margins are very healthy right now.
- Free Cash Flow: SLB’s Free Cash Flow is healthy, at about $3.4 billion, but has been declining since late 2015 from a high above $7.5 billion. In addition, Net Income for the company is currently negative, which is an indication they are spending more money than they are bringing in and relying on their cash reserves to make up the difference.
- Debt to Equity: SLB has a debt/equity ratio of .36, which is conservative. The company has more than $4.1 billion in cash and liquid assets, which means they should be able to keep servicing their debt for the time being without problems. Since the first quarter of 2016, cash and equivalents have declined by more than 70%. This is a big red flag that to me suggests the company is dealing with significant operational problems that have yet to be addressed.
- Dividend: SLB pays an annual dividend of $2.00 per share, which at its current price translates to a dividend yield of about 2.92%.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SLB is $26.95 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.53. The average for the Energy Equipment & Services industry is 2.1, while the historical average for SLB is 2.66. Together, these tell me the stock is fairly valued right now, with little to support an argument for a higher price. Another warning sign to me is the fact that the stock is currently trading more than 17% above its historical Price/Cash Flow ratio. That number signals a drop could push the stock as low as $54 at minimum.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The stock has rebounded from a recent pivot low around $64 (highlighted using the blue, dashed line) in late June and managed to build some bullish momentum to get to its current level around $68.50 per share. It is approaching what I think will be pretty significant resistance between $69.50 and $70 per share, which I’ve highlighted using the red, dashed horizontal line. If the stock’s current bullish momentum is strong enough to push above that resistance, it would likely find its next support around $75, shown with the yellow, dashed horizontal line. I expect these levels to continue to work against allowing the stock to establish a clear upward trend over anything longer than a short-term period of time.
- Near-term Keys: If you don’t mind working a short-term trade to capture quick profits, a push above $70 per share could be a good signal to enter a bullish trade, either by buying the stock outright or using call options, with an eye on $75 per share as an exit point. On the other, a break below support around $64 should be a major warning sign for any bullish positions you might have on this stock. It could also be a decent signal to short the stock or work with a bearish trade using put options.