On Mar 26, Zacks Investment Research downgraded Schlumberger Limited SLB − a leading oilfield services company − to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
The prolonged weakness in the oil and natural gas sector owing to a supply glut of the commodities in the face of lackluster demand is now common knowledge. In fact, low oil prices since mid-2014 have been hitting the market hard, leading many energy players to touch their respective 52-week low marks.
Natural gas prices are way below the heights reached some years back. From a peak of about $13.50 per MMBtu in 2008 to below $2 now, the plummeting value of natural gas represents a decline of around 86.3% over the past eight years. In fact, prices tumbled to the lowest point in almost 17 years in Dec 2015. With production from the major shale plays remaining strong and the commodity’s demand failing to keep pace with this supply surge, natural gas prices have seen a precipitous fall.
Oil prices on the other hand have not fared well either. From a price of over $100 per barrel during mid-2014, the commodity closed at $39.39 recently, marking over 60% decline. Excess supply of the commodity is the major reason behind the bearish trend.
Now, how are oil and natural gas prices affecting Schlumberger’s business? The answer to this is the reduction in capital spending by drillers following the extended slump in commodity prices. Hence, Schlumberger, which helps drillers set up oil wells, is also facing the brunt of the reduced spending. This is reflected in the company’s present guidance where the company projects a 15% fall in revenues in the first quarter of 2016 from the fourth quarter of 2015.
As a result of such bearish factors, the tendency of downward estimate revision has been more obvious in recent times. In fact, the Zacks Consensus Estimate for the first quarter of 2016 stands at 46 cents, 13.2% lower than 53 cents projected around 60 days ago. Moreover, for full-year 2016, the Zacks Consensus Estimate is pegged at $1.93, reflecting a decline of 15.4% from $2.28 over the same time frame.
Stocks to Consider
Some better-ranked stocks in the energy sector include Murphy USA Inc. MUSA, Vanguard Natural Resources, LLC VNR and Antero Resources Corporation AR. All the stocks sport a Zacks Rank #1 (Strong Buy).
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