Schlumberger Earnings Preview: More Cuts Coming To Save Its Rich Dividend?
Investing.com | Oct 17, 2019 09:51
* Reports 3Q 2019 results on Friday, Oct. 18, before the open
* Revenue Expectation: $8.52 billion
* EPS Expectation: $0.41
Shares of Schlumberger (NYSE:SLB), the world’s largest oil services provider, have been in a deep slump for a long while. Ahead of the company's 3Q earnings on Friday, we take a look at what's caused it and what may lie ahead.
In the current deteriorating macro environment, the world’s largest oil and gas producers have been reluctant to increase spending, thus thwarting the company's efforts to recover from the downturn it's been stuck in since the middle of 2014.
Schlumberger, which operates in more than 120 countries, supplying the industry's most comprehensive range of products and services, from exploration through production, has seen its stock plunge more than 45% in the past year. Trading at $31.95 at Wednesday's close, it’s down more than 65% in the past five years.
This drastic correction has made its stock quite cheap. Its forward price-to-earnings multiple of 17.37 is close to the lowest in the past five years, while its 6.1% dividend yield looks attractive in this low-rate environment.
These multiples may appear appealing, but with no near-term growth catalyst on the horizon, investors have no incentive to get excited about the oil servicing companies.
h2 Slowing Oil and Gas Investment/h2Under pressure from shareholders, exploration and production companies are keeping spending in check, returning most of their free cash flow to shareholders in the shape of dividends and share buybacks.
Schlumberger itself isn’t shying away from admitting that reality. In the last conference call in July, the company told analysts that it expects oil production from North American shale basins to slow as explorers cut spending after the recent wave of mergers and acquisitions and the move away from growth.
Spending among producers in North America is likely to decline 10% this year, according to Schlumberger — and the only other avenue though which the company can increase revenue is via its international business.
Schlumberger’s business outside the U.S. and Canada is where the company generates most of its income. The company is forecasting single-digit growth for 2019, with explorers slated to boost spending as much as 8%. The earnings potential for Schlumberger internationally is about four times that of its competitors when considering its larger market share and operating margin.
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But betting on its global growth is also risky. Many large oil producing nations are in pain and keeping their supplies under check because of fears of a global supply glut. We don’t expect that situation to change anytime soon, and hence see no near-term upside for Schulmberger stock.
In its call with analysts tomorrow, the most important thing for investors to focus on is how many more cuts in capital spending Schulmberger is willing to make to protect its $2 a share annual dividend.
Bottom Line
The stocks of oil services companies have become cheaper after a precipitous decline in the past five years. But despite their more attractive valuations, we don’t think the time has come to snap up their shares. In this uncertain global economic and geopolitical environment, oil prices may not remain higher sustainably. It would be better for investors to avoid entering this trade now.
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