What happened

Shares of Schlumberger Limited (NYSE:SLB) fell a steep 19% in February, according to data from S&P Global Market Intelligence, far more than the roughly 8% decline seen in the S&P 500 Index. But that's just one month -- between January and February Schlumberger has lost nearly a third of its value. There's a clear connection to COVID-19 here, but it's really something of a second-order effect. 

So what

Schlumberger is one of the world's largest providers of services to the global energy industry. When oil prices are low, demand usually falls for the drilling services that the company provides. When news of the coronavirus in China started to pick up in January, oil markets quickly became concerned that the country's demand for energy would fall. As China is one of the world's largest demand centers, this is a pretty big deal, and oil and natural gas prices started to decline. That directly impacts oil drillers' top and bottom lines.

Oil rigs with the sun setting in the background.

Image source: Getty Images.

Low energy prices generally lead to a pullback in drilling activity. And that means less work for Schlumberger, which is why investors started to push its shares lower in January. When the February market swoon finally took hold, it was just more of the same for the company. 

Making matters worse, Schlumberger's late January earnings release did little to assuage investor concerns. Notably, fourth-quarter sales fell sequentially from the third quarter. Although international sales were up, weakness in onshore U.S. drilling was still a drag on results. The company announced that it was continuing to move away from this region, but further oil price declines simply mean that onshore U.S. results will likely remain a big headwind. Schlumberger is trying to navigate through this issue, but it is likely to get worse and not better over the near term. To put some numbers on that, North America makes up about a third of the company's revenues, and sales were down 10% year over year in 2019.    

Now what

Schlumberger is one of the largest, best-positioned, and best-managed energy services companies in the world. It's unlikely that this oil bear market and the coronavirus are insurmountable obstacles. However, surviving this rough patch isn't the same as thriving in it. Near-term results are unlikely to be good reading. Expect more volatility ahead here.