Schlumberger (SLB) Up 13.5% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Schlumberger (SLB). Shares have added about 13.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Schlumberger due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Schlumberger Beats on Q1 Earnings, Cuts Dividend by 75%

Schlumbergerannounced first-quarter 2020 earnings of 25 cents per share (excluding charges and credits), surpassing the Zacks Consensus Estimate by a penny. However, the bottom line fell 17% from 30 cents a year ago.

The oilfield service giant recorded total revenues of $7,455 million, which missed the Zacks Consensus Estimate of $7,574 million and decreased 5% from the year-ago quarter’s $7,879 million.

The better-than-expected earnings can be attributed to resilience in the company’s international business, which performed amid a difficult operating environment. Profits from Drilling, Reservoir Characterization and Cameron segments outpaced expectations. However, the positives were partially offset by lower Well Services activity and weaker Artificial Lift Solutions sales in international markets. Moreover, decreased software and multiclient seismic licenses’ sales affected Schlumberger’s quarterly results.

Segmental Performance

Revenues in all the four reporting segments of Schlumberger decreased in the first quarter. The company’s businesses in the quarter were affected by global market uncertainty that stemmed from coronavirus pandemic, and an oil-price war between Saudi Arabia and Russia. The oversupplied hydrocarbon market created a challenging environment for Schlumberger’s clients. As such, drilling activities and customer spending in North America significantly declined.

The resilience in the company’s international business, which performed amid a difficult operating environment, benefited quarterly results. However, in the international market, lower winter activities in Russia, Central Asia, United Kingdom and other regions affected Schlumberger’s businesses. Moreover, WesternGeco® multiclient seismic license sales declined in the Latin America region. Declined product sales in the Middle East & Asia affected the company’s revenues.

Revenues at the Reservoir Characterization unit totaled $1,311 million, down 10% from the year-ago period. Moreover, pre-tax operating income of $184 million was down 35% year over year and lagged the Zacks Consensus Estimate of $299 million.

Revenues at the Drilling unit declined 4% year over year to $2,291 million. Moreover, pre-tax operating income was $285 million, down 7% year over year. Nonetheless, the figure outpaced the Zacks Consensus Estimate of $235 million.

Revenues at the Production segment declined 6% from the year-earlier quarter to $2,703 million. Also, pre-tax operating income decreased 2% year over year to $212 million but beat the Zacks Consensus Estimate of $194 million.

Revenues at the Cameron segment amounted to $1,254 million, marginally down from the year-ago period. Moreover, pre-tax operating income declined 18% from the prior-year quarter to $121 million but surpassed the Zacks Consensus Estimate of $98 million.

Cash Flow

The company recorded positive free cash flow of $179 million in the quarter against the year-ago period’s negative $283 million.

Due to the current market uncertainty, the company declared quarterly dividend of 12.50 cents, reflecting a 75% decline from the prior dividend payout of 50 cents. The announced dividend is payable on Jul 9 to shareholders of record on Jun 3. This move will likely allow the company to conserve cash.

Financials

Capital expenditures in the quarter were recorded at $407 million, down from the year-ago period’s $413 million.

As of Mar 31, 2020, the company had approximately $3,344 million in cash and short-term investments, plus $15,409 million of long-term debt. This represented a debt-to-capitalization ratio of 49.1%.

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Schlumberger projects 2020 capital expenditure at $1.2 billion, suggesting a decline from the 2019 level of $1.7 billion. Overall capital investment — which includes capital expenditures, and multiclient and APS investments — is expected to be $1.8 billion, indicating a 30% decrease from 2019 levels.

The company expects global capital expenditure to decrease by 20% this year. North America alone is expected to witness a 40% drop in capital expenditure.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -110.17% due to these changes.

VGM Scores

At this time, Schlumberger has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Schlumberger has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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