On Dec 22, 2015, we issued an updated research report on leading oilfield services company, Schlumberger Ltd. SLB.
Activity weakness in North America, where Schlumberger has a vast exposure, is likely to depress its share prices going forward. The prevailing weakness in pricing and offshore activity during the quarter as well as hydraulic fracturing-related work continues to face difficulty from overcapacity and will likely continue to decline this year.
Schlumberger expects international exploration and production spending to decline 15% year over year in 2015. Decline in activity, especially in China, the Asia Pacific, Australia, Russia and North Sea, will continue to pressure revenues. Further, weaker pricing from key contract rollovers and re-negotiations is expected to adversely impact 2015 revenues.
Schlumberger's financial and operational performances face a number of headwinds. These include changes in exploration and production spending patterns, commodity price fluctuations, geopolitical risks, regional spending trends, competition, the emergence of new technology and changes in economic conditions. Additionally, foreign currency fluctuation is a threat to the company's profitability.
Seasonal and adverse weather conditions, such as hurricanes in the Gulf of Mexico (GoM) and extreme winter conditions in the U.S., Canada, Russia, and the North Sea, may affect demand for the company’s services and operations.
However, we expect the combination of Schlumberger's strong balance sheet, technological leadership and efficient management to prove beneficial in the long term. Moreover, the company’s efforts to increase capacity in pressure pumping and to boost deepwater activity in the GoM should add to revenues going forward. Though hydraulic fracturing pricing and land drilling activity remained depressed throughout North America, it was more than offset by the company’s superior technology, internal efficiency gains and size.
Further, Schlumberger generates about two-thirds of its revenues internationally, which marks the highest ratio among the biggest oilfield service providers. The company’s strength also lies in effective implementation, strong contracts and new technologies.
In the international arena, the company is aiming for continued margin improvement underpinned by the Middle East/Asia regions. The Middle East, Sub-Saharan Africa and India, in particular, are expected to be sources of strength in the coming quarters.
Zacks Rank and Stocks to Consider
Schlumberger carries a Zacks Rank #4 (Sell). Some better-ranked players from the energy sector are Energy Transfer Equity, L.P. ETE, ReneSola Ltd. SOL and Boardwalk Pipeline Partners, LP BWP. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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