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Why Schlumberger Stock Fell 54% in the First Half of 2020

By Reuben Gregg Brewer – Jul 6, 2020 at 11:57AM

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This year has been terrible for shareholders of the oilfield services giant as the supply of crude has outstripped the world's demand.

What happened

The shares of Schlumberger (SLB 0.74%) fell by 54% between Jan. 1 and June 30, according to data from S&P Global Market Intelligence. Most of that decline took place in the first quarter, and the stock has actually recovered some of the ground it lost -- at one point, it was down nearly 70%.

So what

The big story here is the collapse in the price of crude oil: Schlumberger provides a broad suite of services to the energy sector. The global supply-and-demand dynamic for oil was already a little out of balance when the year began, but the economic shutdowns imposed to slow the spread of COVID-19 led to a massive oversupply situation. Oil prices tumbled to historic lows, with futures prices falling below zero at one point.

An offshore drilling rig

Image source: Getty Images

That doesn't have a direct impact on Schlumberger, but it does on its customers, and the tap-on effect has been huge. The company's customers have pulled back hard on capital spending plans, which means less business for Schlumberger. Investors reacted accordingly and sold the stock. To put some numbers on how bad the situation is, the company took material one-time charges in the first quarter that pushed its bottom line to a loss of $5.32 per share.  

Although economies around the world are starting to reopen, the process hasn't been smooth.  The United States is experiencing a massive surge in COVID-19 cases, and daily diagnoses are rising in other markets as well, all of which threatens oil demand. With a huge amount of oil sitting in storage (which is where the surplus went when demand plummeted), significant changes will have to occur in order for oil prices to mount a sustained recovery. The time those changes will require, in turn, will delay the date when energy extractors will start to open their wallets again to oilfield services providers. Thus, Schlumberger's business could remain under pressure for some time.

Now what

Investors should expect volatility to continue here, with the path of the COVID-19 pandemic an important factor to monitor. However, even if oil prices start to recover, it could still be some time before Schlumberger's business starts to pick up, since the company's fortunes are linked directly to the capital spending plans of its customers. This is not a stock for the faint of heart today.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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