Oil prices were among some of the most dramatically impacted components of the global economy at the early stages of the coronavirus pandemic. As businesses were shuttered, and shelter-in-place orders ground economic activity everywhere to a halt, demand for crude oil cratered; both West Texas Intermediate (WTI) and Brent crude fell to shockingly low levels. That pressure came on the heels of a price war between Saudi Arabia and Russia that had already started putting pressure on oil at the beginning of the year. While the stock market found a bear market bottom in mid-March, oil continued to struggle and didn’t find a practical low until the beginning of May. Since then, gradual economic reopening and the lifting of some social restrictions has renewed some of the demand for oil. Production cutbacks across the world have also curbed supply, pushing both WTI and Brent crude futures into the mid-$50 range.
The rally from their lows – WTI crude bottomed at less than $10 per barrel, while Brent’s bottom was a little below $20 – has been impressive in the last couple of months, and has helped provide enough of a tailwind for the more conservatively managed companies in the sector to start stabilizing their balance sheets and begin to recover from of what many analysts thought might be an unsalvageable situation. It’s true that many of the largest, most recognizable names in the industry have absorbed big blows in the form of Net Income turns to negative territory and declining profitability as reflected by measurements like earnings and free cash flow.
The inauguration of a new President with a very different agenda as it relates to energy generation is also something that is worth thinking about. President Biden has reaffirmed his commitment to many of the same initiatives the Obama administration had begun to put in place to reduce dependence on fossil fuels and increase “clean energy” programs. Many of those policies were eliminated during the Trump administration, which took a more accommodative approach to the sector. The political pendulum is swinging back in the opposite direction, which means the sector is going to have pivot once again to a “new normal” that remains to be seen.
Schlumberger N.V. (SLB) is one of the largest companies in the world in the Energy Equipment & Services industry. It’s stock price throughout the past year has pretty much mirrored that of the rest of the energy sector, dropping from around $42.50 before the pandemic to a March low around $12 before rallying to a peak in June at around $22.50 per share. From that point, the stock dropped back again to touch its next low at around $14 in November. It then rallied pretty strongly to a peak at around $26 at the beginning of this month, but has since slid back to a current price at around $23. There are aspects of SLB’s fundamental profile that are better than you might expect them to be, including a turn in the last quarter to profitability that might be a sign it is turning the corner from drastic, pandemic-induced drawdowns. Is that good enough to make a case to add SLB to a growing list of stocks in the Energy sector that are presenting tempting value prospects? Let’s take a look.
Fundamental and Value Profile
Schlumberger N.V. provides technology for reservoir characterization, drilling, production and processing to the oil and gas industry. The Company’s segments include Reservoir Characterization Group, Drilling Group, Production Group and Cameron Group. The Reservoir Characterization Group consists of the principal technologies involved in finding and defining hydrocarbon resources. The Drilling Group consists of the principal technologies involved in the drilling and positioning of oil and gas wells. The Production Group consists of the principal technologies involved in the lifetime production of oil and gas reservoirs and includes Well Services, Completions, Artificial Lift, Integrated Production Services (IPS) and Schlumberger Production Management (SPM). The Cameron Group consists of the principal technologies involved in pressure and flow control for drilling and intervention rigs, oil and gas wells and production facilities. SLB has a current market cap of $30.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased -43.6%, while sales declined -32.77%. In the last quarter, earnings improved by 37.5% while sales grew by 5.21%. SLB’s operating profile matches its earnings pattern; Net Income versus Revenue over the last year was -44.57%, but managed to strengthen in the last quarter to 6.76%. The turn to positive Net Income on a quarterly basis could be an early sign the company has navigated its way through the worst effects of the pandemic, but a useful pattern of improving Net Income on an annual basis could take several quarters to be seen.
Free Cash Flow: SLB’s Free Cash Flow is generally healthy, but also reflects the challenges of the past year, at a little more than $1.4 billion. That represents a decline from $4.46 billion at the end of 2019 and a little over $4 billion at the mid-point of 2020. The current number translates to a Free Cash Flow Yield of 4.31%.
Debt to Equity: SLB has a debt/equity ratio of 1.28, which indicated the company is highly leveraged, which isn’t particularly surprising given that a number of companies in the Energy sector have borrowed heavily during 2020. Cash and liquid assets in the last quarter were $844 million versus $16 billion in long-term debt. This is a pretty clear indication of the pandemic’s effect on SLB’s bottom line, which is putting pressure on the company’s liquidity. It is also a reason that I think paying attention to Net Income on both a quarterly and annual basis are going to be important in the next few quarters.
Dividend: SLB pays an annual dividend of $.50 per share (reduced from about $2.00 per share in 2019, which is no surprise given the erosion of the company’s profitability), which at its current price translates to a dividend yield of about 2.2%.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at almost $24 per share. That means the stock is only somewhat undervalued, with about 9% upside from the stock’s current price, and a useful discount at around $19.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the last year of price activity, with the diagonal red line tracing the stock’s plunge from about $36 in February to a pandemic-induced low at around $12 in March. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After pushing all the way to the 50% retracement line at around $23 in June, the stock dropped back to a late October low at around $13.50 before starting a new rally that peaked earlier this month at around $26.50 where the 61.8% retracement line currently sits. The stock has dropped back from that point but appears to be moving off of support around the 38.2% retracement line around $21, which also lines up with a pivot low point at the end of December. Immediate resistance is at around $24, with next resistance at the last, $26.50 peak. A drop below support at $21 could see the stock drop to somewhere between $17 and $18 before finding new support.
Near-term Keys: There really isn’t any way to suggest that SLB’s value proposition right now is useful; under current circumstances, only an extremely aggressive and speculative investor would be willing to buy the stock with any kind of long-term forecast right now given the current difficulties in the company’s operating profile. That means that the best probabilities lie with short-term trading strategies; if the stock drops below $21, consider shorting the stock or buying put options, using $18 as a quick-hit profit target. A rally and break above $24 could offer an interesting signal to buy the stock or work with call options, using the stock’s last peak at $26.50 as a useful profit target on a bullish trade.