(Idea) Schlumberger
SLB is a conservative way to play the ongoing upturn in the oil and gas capital cycle. We expect the current cycle to be long-lived and increasingly service-intensive. Growth in SLB’s revenues, margins, EBITDA, and earnings are likely to send the shares above $65 over the next two years. Meanwhile, the company’s dividend—which generates a safe 2.4% yield on the current share price—is likely to grow.
Our SLB investment thesis is based on the bullish backdrop for the oilfield services industry that we expect to play out over multiple years. SLB shares should therefore be bought with the intention of holding for at least three years. Over that timeframe, we expect limited downside risk from the current price.
Given the risk/reward proposition on offer, we consider SLB shares to be among the most conservative equities to play the oil and gas cyclical upswing.
A Leading Beneficiary of the Oil & Gas Upcycle
SLB Ltd. (SLB)—formerly called Schlumberger Ltd.—is a leading global oilfield services provider with a presence in more than 100 countries and nearly every producing hydrocarbon basin in the world. The company is domiciled in Curacao and its shares trade on the New York Stock Exchange. Its executive offices are located in Houston. Its services help upstream oil and gas operators maximize the value of their assets by reducing maintenance costs, accelerating drilling times, increasing the efficiency of oil and gas-producing assets, and reducing emissions.
The global oilfield service industry is undergoing an upswing in its capital cycle characterized by increasing international exploration and development activity amid tight service capacity. Consolidation and bankruptcies during the last downturn have winnowed the industry’s playing field. At the same time, increasing technological sophistication among existing service providers has created barriers to entry. The incipient cyclical upswing is an attractive environment for dominant incumbents like SLB.
SLB stands to benefit from the macro trends currently driving the oil and gas upcycle, such as:
Continued growth of global oil and natural gas demand over at least the next decade.
Increased production discipline among shale operators, which will increase the cost per barrel to find and develop marginal supply relative to the shale boom years prior to 2020.
Maturing short-cycle production in North America that is transitioning to increased investment in long-cycle production internationally.
Greater service intensity of production, as new finds are harder to come by, E&Ps strive to maximize production from existing assets, and reducing emissions becomes a priority.
Elevated oil and natural gas prices, which will spur efforts to mitigate production declines.
Learnings and new technology from North American unconventional production that can be rolled out globally.
SLB’s scale, depth of service offerings, and diverse base of high-quality customers are likely to drive its revenue and earnings higher as the cycle matures. However, these improvements aren’t fully discounted in SLB’s stock at their current price of $47. We expect SLB’s improving financial results to drive its shares past $65 over the next two years. Such capital appreciation combined with dividend payments implies a 43% total return over that timeframe.
International Opportunities Abound
The global oil and gas industry is in an early stage of an upcycle. Over the next year or two, we believe the cycle will be given further impetus as average annual U.S. shale growth slows significantly from its current level of 300,000 to 500,000 barrels per day.
U.S. shale production has accounted for more than 80% of global production gains since 2010. As global oil demand continues to grow, the necessity of growing supply in the presence of slowing U.S. shale production will result in capex being directed outside of the U.S. to markets where SLB has long had a presence and currently occupies a strong competitive position. These include the most prolific oil-producing regions in the world in South America, Africa, and Asia.
SLB’s international business, which accounts for 82% of its revenues, will drive companywide growth even as its North American business lags. The dynamic was seen in the first quarter, when a 6% revenue decline in SLB’s North American business was offset by revenue gains on the international side that drove total company revenue 7% higher after adjusting for the impact of acquisitions.
The momentum in SLB’s international business has been evident across the board. The company splits its business into separate “GeoUnits” that serve particular oil and gas basins. In the first quarter, 21 of its 25 international GeoUnits experienced revenue growth. Its Middle East and Asia business achieved revenue growth of 29% over the previous year.
Meanwhile, SLB’s offshore business won contracts in Brazil, Nigeria, and China. Management is guiding to 20% growth in offshore bookings this year compared to 2023.
We expect SLB’s international business to continue to improve as the capital cycle matures over at least the next few years.
SLB is not only exposed to the oil upcycle. It will also benefit from increasing global capex directed toward natural gas production. This was also on display in the first quarter when, in January, Saudi Arabia abandoned its efforts to increase its oil production capacity from 12 to 13 million bbl/d. The stock market interpreted the news as negative for SLB, sending its shares down 8% on the day of the announcement. However, the market’s reaction missed the fact that SLB emerged as a net beneficiary of the Kingdom’s moves. As it moved away from oil development, it simultaneously pivoted toward onshore unconventional natural gas production serviced by SLB. The boost to SLB from service-intensive natural gas business will offset the impact of losing Saudi Arabia’s oil development business.
This incident provided an example of how SLB can use its scale to its advantage. It also illustrated that SLB’s prospects—and share price—are not fully appreciated in today’s market.