Earnings estimates have fallen sharply for Schlumberger (SLB) following its Q3 earnings report. The drop in consensus estimates has been significant enough to send the stock to a Zacks Rank #5 (Strong Sell).
Schlumberger continues to face major headwinds as a result of the plunge in oil prices. This has led to not only a drop in revenue but in profit margins as well. And the valuation picture doesn’t look very compelling with shares trading at more than 20x forward earnings.
Schlumberger provides a wide range of products and services to the oil and gas exploration and production industry. The company manages its business through three groups:
- Reservoir Characterization (27% of total revenue in Q3), which is involved in finding and defining hydrocarbon resources.
- Drilling (38%), which is involved in the drilling and positioning of oil and gas wells.
- Production (35%), which is involved in the lifetime production of oil and gas reservoirs.
Third Quarter Results
Schlumberger reported its third quarter results on October 15. Revenue plunged 33% year-over-year to $8.472 billion, missing the Zacks Consensus Estimate of $8.556 billion.
Revenue fell 31% in the Reservoir Characterization segment, primarily due to “sustained cuts in exploration spending”. Revenue plunged 32% in the Drilling segment, primarily due to “persistent international pricing pressure and activity declines”. And revenue declined 35% in the Production segment, primarily due to “customer budget constraints in the International markets”.
Operating income was cut nearly in half as the operating margin fell from 20.6% to 15.8% of revenue. Earnings per share fell 48% to $0.78, although this was ahead of the Zacks Consensus Estimate of $0.76.
The cash flow picture is not as weak for Schlumberger though. The company generated $6.6 billion in operating cash flow through the first nine months of 2015, which is down just 9% year-over-year.
Estimates Falling
Analysts virtually unanimously lowered their earnings estimates for both 2015 and 2016 following the Q3 report. This was significant enough to send the stock to a Zacks Rank #5 (Strong Sell).
Unsurprisingly, this negative earnings momentum has persisted since the second half of 2014, when oil prices began to plunge, as you can see in Schlumberger’s “Price & Consensus” chart:
The current Zacks Consensus Estimate for 2015 is $3.40, down from $3.56 sixty days ago. The 2016 consensus estimate is now $2.93, down from $3.85 over the same period.
Valuation
Unless oil prices suddenly surge and production ramps up, Schlumberger doesn’t look like a screaming value here. The stock trades at 23x 12-month forward earnings, and that’s if earnings estimates stop declining.
The Zacks Value Style Score for Schlumberger is a ‘D’.
The Bottom Line
With major industry headwinds, falling revenue and profit margins, persistently declining earnings estimates and a forward P/E north of 20, Schlumberger doesn’t offer investors much to like right here.
Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.
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