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Why Is Schlumberger (SLB) Down 17.5% Since Last Earnings Report?

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It has been about a month since the last earnings report for Schlumberger (SLB - Free Report) . Shares have lost about 17.5% in that time frame, underperforming the S&P 500.

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

Schlumberger Q3 Earnings Beat Estimates, Rise Y/Y

Schlumberger’s third-quarter 2018 earnings of 46 cents per share (excluding charges and credits) trumped the Zacks Consensus Estimate of 45 cents and also improved from the year-ago quarter’s adjusted figure of 42 cents.

The oilfield service giant logged total revenues of $8,504 million, which rose from $7,905 million in the prior-year quarter. However, the figure lagged the Zacks Consensus Estimate of $8,593 million.

The results were driven by massive drilling activities in the international market. Improved performances by the company’s directional drilling operations in the North American land resources and strong vertically integrated sand businesses also supported the impressive third-quarter numbers. However, the performance was partially negated by reduced hydraulic fracturing activities in the international market.

Segmental Performance

Drilling and Production units registered a year-over-year increase in revenues while Reservoir Characterization results declined from the year-ago quarter’s tally.

Drilling segment revenues increased primarily on contributions from robust activities in the international markets, namely Russia, Saudi Arabia, Mexico, India and Iraq following deployment of additional rigs. Moreover, the company’s directional drilling businesses performed well in the unconventional resources in North America, boosting the segment’s revenues.

The pre-tax operating income of the segment was backed by higher profitability from some of the company’s Integrated drilling services (IDS) developments that commenced operating in the preceding quarter.   

Results in the Production segment were positively impacted by vertically integrated sand businesses. Higher product sales along with robust service activities in Latin America and North America also attributed to this improvement. However, weaker activities associated with hydraulic fracturing in the international market partially offset the segment’s results.

Lower OneSurface sales in Kuwait induced soft revenues at Reservoir Characterization segment, partially compensated by strong contributions from product lines like Wireline and Testing Services following robust summer operations in Russia.

Revenues in the Reservoir Characterization unit totaled $1,673 million, down from $1,771 million in the prior-year period. However, pre-tax operating income was $373 million, up 20% year over year and beating the Zacks Consensus Estimate of $361 million.

Revenues in the Drilling unit summed $2,429 million, up 15% year over year. Pre-tax operating income was $339 million, increasing 13% year over year. However, the figure missed the Zacks Consensus Estimate of $354 million.

Revenues in the Production segment rose 13% from the year-earlier quarter to $3,252 million. Pre-tax operating income jumped 13% year over year to $320 million but fell short of the Zacks Consensus Estimate of $357 million.

Revenues in the Cameron segment amounted to $1,298 million, almost in line year over year. Pre-tax operating income dropped 23% from the prior-year quarter’s figure to $148 million. However, the same beat the Zacks Consensus Estimate of $140 million.

Financials

As of Sep 30, 2018, the company had approximately $2,854 million in cash and short-term investments plus $14,159 million as long-term debt. This represents a debt-to-capitalization ratio of almost 32%. In the July-to-September quarter, the company repurchased 1.5 million shares. 

Outlook

Schlumberger is expecting demand for crude and world-wide economic growth to remain on a solid ground. This will likely lead to overall higher investments for exploration and production activities in the international market and hence could be a favorable push for its oilfield services businesses. 

Although the pipeline bottleneck problem in the Permian Basin has been hurting the company’s operations in U.S. shale plays, it still expects the problem associated with the constraint in pipeline transportation capacity to get settled in the coming 12-18 months.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -12.36% due to these changes.

VGM Scores

Currently, Schlumberger has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, 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. It's no surprise Schlumberger has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.




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