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Why You Need to Own Schlumberger

By Anthony Di Pizio - Updated Mar 30, 2021 at 9:36PM

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As the economy transitions from bust to boom, the biggest oil services giant in the world stands to outperform.

The perfect storm hit the energy sector in 2020 -- a demand and supply shock that could only be triggered by a pandemic-like event, forcing entire countries to shut down. Oil services company Schlumberger (SLB 0.66%) weathered this period incredibly well, and with an impending stimulus-led economic boom on the horizon, it is positioned to exceed expectations. Despite a shift toward green energy, oil remains key to satisfying the world's power demands.

A finger touches a computer screen charting oil prices, overlaid atop an image of an offshore oil rig.

Image source: Getty Images.

A value-based opportunity

Schlumberger provides the necessary components and technologies (like software and drilling rigs, for example) to oil companies to get their resources out of the ground. It's almost twice the size of its nearest competitor, with a larger geographical footprint -- it operates across 120 countries! -- providing a dominant market position. 

The stock is really cheap at the moment. Let's look at a metric known as enterprise value, or EV for short. By factoring in market capitalization, cash and debt, it provides an accurate representation of a company's total worth. Think of it as what you'd pay to buy a company outright. 

For Schlumberger, this figure stands at $52 billion. Yet the stock trades at a current market capitalization of $38 billion -- about 27% below that figure, even though Schlumberger delivered positive earnings and revenue growth in the fourth quarter of 2020, beating analyst expectations! 

Trading below EV is a common theme in the oil industry right now, as it tries to recover from its worst year in history. Compare that to a familiar company like Apple, which trades slightly above its EV. 

For oil stocks, this gap exists because investors doubt the oil industry's ability to mount a comeback, given the shift toward green energy. That's a valid concern! However, with oil prices back to pre-pandemic levels, market forces should trigger more drilling as companies rush to fill gaps left by players who exited the space last year. This is great for Schlumberger because it gives them more customers!

The resulting production boom should help close this market cap-to-EV gap. Keep an eye on that difference as the economy improves.

Earnings are still really important

Over the last few weeks, some of the highest-flying, growth-oriented, user-growth-only valued technology companies have retreated significantly from their highs. Many of them don't make money and have no clear path to doing so. Investors have increasingly been rotating into more stable companies that generate cash.

Schlumberger fared well during the pandemic on account of its diverse, widespread customer base. The company not only survived 2020 but also delivered $23.6 billion in revenue for the full year. While this figure fell 28% from 2019, the company's quarterly earnings-per-share picture is improving.

Quarter

Earnings Per Share

Q1 2020

$(5.32)

Q2 2020

$(2.47)

Q3 2020

$(0.06)

Q4 2020

$0.27

Data source: Company earnings releases.

The fourth quarter delivered profits, but also quarterly revenue growth in all four divisions of the company for the first time since the third quarter of 2019. This was driven by a bounce-back in the energy industry overall, and it's imperative that the trend continues in the first quarter this year. If so, Schlumberger could be entering a period of hypergrowth boosted by several key factors.

Count those drilling rigs

One of the most important data indicators for Schlumberger is the Baker Hughes Rig Count, which provides a weekly update of the number of active rigs drilling for oil worldwide. Trends in this data provide an early indicator of the amount of potential business for Schlumberger; after all, these are their customers!

The pandemic exacted a serious toll on oil drillers.

GLOBAL RIG COUNT

Year

High

Low

Average

2019

2,306

2,123

2,177

2020

2,125

1,016

1,352

2021

1,270

1,183

1,227

Data source: BakerHughes.com.

Between February and October of 2020, rig counts fell by more than half. By no coincidence, Schlumberger's stock price was down 54% over the same period. 

Rig counts have risen sharply off those lows, especially in the US, the world's biggest oil producer.

Month

Global Rig Count

US Rig Count

October 2020*

1,016

280

November 

1,074

310

December 

1,104

339

January 2021

1,183

369

February 

1,270

398

GROWTH

25%

42%

*Pandemic low for global rigs. US rig count low was 250, in August.
Data source: BakerHughes.com.

Schlumberger's stock is up almost 100% since striking the October low in rig count. Rig counts are still down materially from 2019 levels. Both in the US and globally, there is room for almost a 100% increase to return there. With oil prices doing their part, what's missing? Demand.

With the US possibly reaching herd immunity from COVID sometime in the summer, and an impending stimulus-led economic boom, expect to see demand for oil skyrocket as the race toward normal life gains momentum. Of course, if our COVID-beating efforts falter, then the argument for this stock may fall apart. 

It is logical to assume oil-related companies could make for troubled investments over the very long term, but strong tailwinds suggest that for the next two to three years, Schlumberger could be a stock to own.

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