Paal Kibsgaard, Schlumberger’s (SLB) chairman and CEO (chief executive officer), anticipates that the oilfield services industry is likely to face challenges in the near term. In the company’s 3Q15 press release, Kibsgaard commented, “However, for oilfield services, the market outlook for the coming quarters looks increasingly challenging with activity expected to be reduced further, as lack of available cash flow exhausts capital spending for a number of our customers, leading them to take a conservative view on 2016 E&P spending in spite of any gradual improvement in oil prices.”
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The reasons for the weak energy environment have been analyzed by Schlumberger management. These reasons include the following:
However, Schlumberger management believes there are some factors at play that can tighten the global energy demand-supply gap and lead to a stronger price scenario. These factors include the following:
Energy price recovery is taking longer than Schlumberger management had anticipated. Many of the leading authorities, including the EIA (U.S. Energy Information Administration) and the IEA (International Energy Agency), are now predicting that subdued crude oil prices will prevail in 2016.
SLB, which was anticipating a quicker turnaround a couple of quarters ago, had to alter its capex (capital expenditure) and investment plans. It also had to modify its cost structure, leaving room for further restructuring charges in the near quarters.
Kibsgaard said in the company’s fiscal 3Q15 conference call, “This charge will cover severance costs for additional headcount reductions reflecting both our updated activity outlook for 2016 and a further streamlining of our support structure. In addition and as part of our internal transformation program, we are now ready to initiate a significant restructuring of our global manufacturing and distribution network, which will also result in a charge in the fourth quarter.”
Given the unpredictability of energy price recovery, Wall Street analysts have divergent opinions about SLB’s target prices in the next 12 months. While the lowest target price for SLB is $68, the highest is $120. The median target price for SLB, surveyed among the sell-side analysts, is $90.
SLB is currently trading at $77, implying a 17% upside at its median price. Oil States International (OIS), a smaller player in the oilfield equipment and services industry, received a $32 median target price. This, relative to its current price of $31, implies a 4% upside. SLB is 7.6% of the Energy Select Sector SPDR ETF (XLE).
In the next part of this series, we’ll look at Schlumberger’s (SLB) segments to understand where growth can come from and where SLB has been stalling.