Schlumberger Ltd (SLB), the globes largest oilfield services company, has shown strong resistance against the historical headwinds that sent U.S. oil rig counts down to only 317 in the mid of this year after they had peaked to 1,609 rigs in October 2014. The steep fall in the U.S. rig counts was as a result of the dramatic plunge in crude oil prices from over $100 a barrel to only $27 a barrel in the beginning of this year.
With Schlumberger operating in every part of the world while having significant exposure to the U.S. energy market, it lost a huge chunk of its revenue and earnings compared to earlier periods.
The company’s revenues slipped from $48 billion in 2014 to only $35 billion in the fiscal year 2015. The company’s management has indicated that its revenue could slip further this year despite acquisition of Cameron, which added almost $1.5B to SLB’s revenue in the second quarter of 2016.
Improving Schlumberger’s Fundamentals
Despite facing historic depression in the energy markets all over the world, Schlumberger remains very sound financially. This has further allowed it to take advantage of the downturn in the business environment and use it as a chance to capitalize on growth opportunities along with molding its business model and cost structure in readiness for the up-cycle.
SLB expanded its technology portfolio with a series of small acquisitions, including the acquisition of Saltel Industries, Omron Oilfield and Marine, Inc., and Xtreme Drilling and Coil Services Corp. The acquisition of Cameron International will enhance its subsea equipment manufacturing capabilities.
The company’s latest financial results are also showing light at the end of the tunnel. The second quarter results clearly demonstrate that SLB’s business fundamentals are slightly improving. Though its revenue declined on year over year basis, the improvement of 10% in revenue on a sequential basis represents signs of improvement. The company’s revenue generation significantly outperformed the industry’s average of a negative 25% drop in the U.S. land oil rig count.
Strong Liquidity Reduces Threats
Amidst falling revenues and declining earnings, Schlumberger’s strong liquidity position allows it to thrive in a depressed environment. It has capitalized on several growth opportunities and significantly reduced its share count while also sustaining its dividends. In the second quarter, it generated a free cash flow of $0.9 billion, whereas dividend payments accounted for only $626 million.
The company’s strong cash position and potential to expand its free cash flows even in a volatile environment suggests that its dividends are safe and the company can invest in any growth opportunity that aligns with its business model and future strategies.
Schlumberger’s share price has surged by nearly 16% since the start of this year, which means that investors have confidence in this oilfield services giant and its potential to survive in the down cycle while re-establishing its foot-prints for future growth. Market fundamentals are improving slightly for oilfield services companies considering the growth in oil rig counts, crude oil prices and the expected growth in U.S. oil production volumes. Therefore, Schlumberger is a good stock to hold, as the market has bottomed in the recent months and it is on verge of achieving a steady rebound.