From a numbers' perspective, oil services giant Schlumberger's (NYSE:SLB) most recent quarterly earnings results were decent, but you won't see anyone posting the results on a refrigerator like a proud parent might. That isn't abnormal for a seasonal business like oil services. What is more important, though, is the ability to capture new business for the rest of the year. In that department, Schlumberger performed quite admirably.
Better yet, Schlumberger's management thinks that we are about to enter a phase of heavy drilling activity and investment in the oil patch. Let's take a look at the company's most recent earnings results, what some of the newly contracted work says about the oil industry, and what investors should make of both the business and the stock today.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$7.83 billion||$8.18 billion||$6.89 billion|
|Pre-tax income||$643 million||($2.21 billion)||$334 million|
|Earnings per share||$0.38||($1.63)||$0.20|
|Free cash flow||($152 million)||$456 million||($381 million)|
Even though Schlumberger's results came in a little lighter than the prior quarter, this quarter's earnings still met Wall Street's expectations. One thing to always keep in mind is that there is some seasonality to the oil services business, and the fourth quarter is typically one of the strongest as clients pay for annual expenses such as software contracts and other recurring revenue.
This was the case as every business segment declined slightly in the first quarter compared to the fourth. While North America, the Middle East, and Russia remain some of the strongest markets for Schlumberger right now, other key regions such as Latin America, the North Sea, and sub-Saharan Africa saw noticeable weakening as many players in this parts of the world are still in the project planning phase as we reemerge from the recent price crash. All in all, it was a decent quarter as revenue, pre-tax income, and margins for all of its business segments improved with the exception of margins for Cameron.
The first quarter may typically be light on revenue an earnings, but it's also heavy on new business announcements as producers finalize their capital spending plans for the year and select contractors for green-lit projects. This quarter's press release was chock-full of new business announcements. The bulk of those awards were for North American land operations, the Middle East, the U.K. and Norwegian portions of the North Sea, and Russia/Kazakhstan.
Like the previous quarter, free cash flow was a little bit lighter than before as management has been in a heavy investment cycle lately. After years of scaling back the business to survive the downturn, the company now has to build up additional capacity to take on these new projects as well as meet the growing demands of North American shale. Management noted that equipment, crews, and supply chains in North America are strained from high demand right now, and it provides oil services companies with lots of investment opportunities.
Even though cash wasn't coming in the door at high rates, management still felt comfortable enough in its financial position to buy back $97 million worth of shares in the quarter. So it would appear that it expects things to pick up substantially in the coming quarters.
What management had to say
During this recent slide and slow recovery, Schlumberger's management has been one of the more pessimistic voices in the oil and gas industry. With so much of their business outside of the U.S., it has a much more global view of the market than some other American-centric peers. This past quarter, though, CEO Paal Kibsgaard seemed to be on board for a full-throated improvement for oil prices and his business in particular. Here's what he had to say in the company's press release about the state of the current oil market.
[T]he absence of global stock builds in the first quarter, supported by the OPEC- and Russia-led production cuts, confirm that the oil market is in balance. More importantly, after three consecutive years of dramatic underinvestment in global E&P spending, the worldwide production base has started to show the anticipated signs of weakness with noticeable year-over-year production declines appearing in several countries such as Angola, Norway, Mexico, Malaysia, China, and Indonesia. With Libya and Nigeria producing at near-full capacity, Venezuelan production in free fall, the potential of new sanctions against Iran, and rising geopolitical risks, the only major sources of short-term supply growth to address global production decline and strong worldwide demand are Saudi Arabia, Kuwait, the UAE, Russia, and the US shale oil industry.
(You can check out the transcript of Schlumberger's most recent earnings conference call here.)
Kicking off 2018 on a good note
One of the concerns for investors headed into 2018 was the continued writedowns and impairments management had taken in the past two years as it tried to right-size the business for today's oil industry. This quarter, those charges were pleasantly absent. Also, pre-tax margins across all business segments were in the double-digit range, which suggests that they are all performing relatively well and there aren't too many unprofitable segments dragging on the bottom line.
Schlumberger has underperformed its largest rival, Halliburton (NYSE:HAL), for some time in large part because of Halliburton's concentration in North American shale. However, as the international oil markets start to wake up and reinvest in their businesses, it will be Schlumberger's time to shine since it has a much larger presence internationally.
It's a little harder to value Schlumberger and other oil services companies because of all the charges and writedowns in recent quarters, but Schlumberger's price to book value of 2.6 times is well below Halliburton's (5.5 times) and has been at lows we haven't seen since the 1980s. This suggests that Schlumberger's stock is quite cheap right now and could be a good value investment compared to its North American rival.