By Andrew Bary
Schlumberger was the Nvidia of the 1980s -- and the beaten-down stock could still produce some Nvidia-like gains.
It's hard to remember now, but Schlumberger, now called SLB, was one of the market's hottest stocks as the leading servicer to the then-dominant energy industry, and at one point had the world's fifth-largest market cap. SLB is still the world's leading oil-services company, with operations in 100 countries, but energy matters little in the S&P 500 index, and the out-of-favor stock isn't trading much higher than it did 40 years ago. With a market value of under $60 billion, it doesn't crack the top 100 stocks in the index.
SLB is worth a fresh look. Despite fears of obsolescence, the oil-and-gas business will probably be around for the rest of this century -- demand continues to rise globally and stands at more than 100 million barrels a day -- and the industry needs the varied expertise in assessing and developing energy deposits that SLB provides.
Shares don't reflect that possibility. SLB stock, at about $40, trade near a recent 52-week low after dropping 23% this year. It fetches a reasonable 11 times projected 2024 earnings of $3.50 a share and under 10 times estimated 2025 profits of $4.13 a share, while yielding 2.8%. It's an attractive entry point for the oil-services company.
"SLB is the industry's technology leader," says James West, an oil-services analyst at Evercore ISI. "It's the entrenched go-to company in every major international market, with the highest returns among its peers."
West carries an Outperform rating and a $74 price target, almost double the current price. He doesn't view his target, which is 14.5 times his 2026 earnings estimate of $5.10 a share, as overly aggressive. "Historically, this was a 20 multiple stock. It's now trading close to high-single digits," he says.
The stock has fallen lately with the rest of the energy sector as oil prices, as measured by West Texas Intermediate, have fallen under $70 a barrel, a new low for the year. That weakness in energy prices reflects concerns about Chinese demand and ample spare capacity among members of the Organization of the Petroleum Exporting Countries. Many energy stocks have recently hit new 52-week lows.
SLB, which was founded in 1926 by French brothers Conrad and Marcel Schlumberger to map geological formations using electrical measurements, has issues of its own, as well. SLB is strong in important deepwater markets such as Brazil, Guyana, West Africa, and the Gulf of Mexico, and in the Middle East, including Saudi Arabia, where it has operated for decades. Typically, that global reach is an advantage, but Saudi Arabia's decision not to invest in boosting oil production in the spring -- although it is committed to expanding gas output 60% this decade -- has weighed on oil-services stocks.
But the overall backdrop for the oil-services industry looks healthy. Global energy capital spending for new deposits -- so-called upstream spending -- continues to rebound from lows hit in 2020 and could approach $500 billion in 2026, up about 20% from this year, according to Barclays energy analysts.
SLB, such as energy industry leader Exxon Mobil, has a strong corporate culture. CEO Olivier Le Peuch, 60, is a company lifer, as are several in the European-heavy top management team. Domiciled in Curaçao, the company has executive offices in four cities, including Paris and Houston.
Le Peuch was upbeat on the company's earnings call in July. He projected "further growth and margin expansion in the second half of 2024 and 2025." Earnings per share are projected to rise 17% this year and next year. The company, he noted, plans to return $3 billion in cash to shareholders in dividends and stock buybacks in 2024 and $4 billion next year.
Greg Buckley, a manager of the Adams Natural Resources closed-end fund, says SLB trades at a free-cash yield of more than 7%, higher than Exxon and Chevron, a sign that it is undervalued relative to its Big Oil peers.
He says that SLB is now valued at about six times projected 2025 earnings before interest, taxes, depreciation, and amortization, or Ebitda, its lowest level in 10 years. He notes that consensus earnings estimates have changed little in recent months even as the stock has come down.
Given the decline in oil prices, there could be risk to 2025 and 2026 earnings estimates, but that possibility seems to be captured in SLB's depressed stock price.
"SLB and its peers are benefiting from strong capital discipline, meaning there isn't too much equipment in the market, and the companies have maintained pricing," Buckley says.
SLB's technological advantage should also benefit the stock, he says. The industry is evolving, with the recovery of oil and gas from existing deposits becoming a critical area for oil explorers. SLB has leading technologies and is poised to enhance its position with a $6 billion deal for ChampionX, a specialist in enhanced oil recovery, that is due to close around year end.
SLB's core business is assessing the size and characteristics of energy deposits and the construction of wells to reach them, no easy job when offshore deposits can be miles beneath the ocean surface. It has a fast-growing, high-margin digital business now accounting for 20% of its profits that involves migrating energy companies to the cloud from on-premise data centers.
The company changed its name to SLB in 2022 to highlight what it called a transformation from an oil-services company "to a global technology company focused on driving energy innovation for a balanced planet." There have been successes in what the company calls its transitional technologies portfolio, which includes hydrogen and carbon capture. The portfolio topped $1 billion in revenue in 2023 -- still just 3% of overall sales.
The company said it achieved a breakthrough in lithium production at a demonstration plant in Nevada, making the light metal 500 times faster than conventional methods while using only 10% of the land.
But SLB is still an oil-and-gas company, and when the cycle turns, investors should return to the industry leader. It's better to buy the stock before they do.
Write to Andrew Bary at andrew.bary@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
September 13, 2024 16:44 ET (20:44 GMT)
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