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How Schlumberger’s Valuation Stands up to Peers

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Mar. 15 2016, Updated 11:04 p.m. ET

Comparable company analysis

As you can see in the table below, Schlumberger (SLB) is the largest company by market capitalization among the group of select OFS (oilfield services and equipment) companies we’ll be comparing here. National Oilwell Varco (NOV) is the smallest of the lot by market capitalization. Schlumberger makes up 23.6% of the VanEck Vectors Oil Services ETF (OIH).

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EV-to-EBITDA

Notably, Schlumberger’s (SLB) EV (approximately the summation of its equity value and net debt), when scaled by TTM (trailing-twelve-month) adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), is higher than the peer average. Adjusted EBITDA excludes extraordinary charges like workforce restructuring charges, inventory write-downs, and asset impairments. Baker Hughes (BHI), however, has the highest TTM EV-to-EBITDA multiple in our peer group.

Forward EV-to-EBITDA is a useful metric to gauge relative valuation. SLB’s forward EV-to-EBITDA multiple expansion versus its TTM EV-to-EBITDA is lower than the average in our peer group. This is because the expected drop in FET’s adjusted EBITDA in 2016 was less extreme compared to those of its peers, and this also explains SLB’s higher current EV-to-EBITDA multiple.

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Schlumberger’s debt levels

Schlumberger’s net-debt to EBITDA multiple is lower than the peer group average. A lower multiple could indicate adequate cash to repay debt, and this is comforting, particularly when crude oil prices are falling. NOV’s net debt-to-EBITDA ratio is the highest in our group. For a comparative analysis of the top OFS companies, check out Market Realist’s series Which Oilfield Service Companies Can Break the Jinx?

Price-to-earnings ratio

Schlumberger’s valuation, expressed as TTM PE (price-to-earnings) multiple of 23x, is higher than the average in the peer group. SLB’s forward PE multiple expansion reflects a less extreme earnings decline compared to peers, which typically reflects in current valuation premium over the peer average. Also, analysts expect a healthy 10% earnings growth for Schlumberger during the next three to five years, and this could very well boost SLB’s valuation in the medium-to-long term.

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