Can Schlumberger Continue to Outperform the Industry ETFs?



Schlumberger’s returns and key drivers

OFS (oilfield equipment and services) companies like Schlumberger (SLB) are affected by rig counts and energy prices. During the past year, the WTI (West Texas Intermediate) crude oil price has dropped by ~27%.

Despite this, Schlumberger’s one-year returns were -9% net of dividends and have been better than the VanEck Vectors Oil Services ETF (OIH), which witnessed a -20% return during the same period. SLB makes up 23.6% of OIH. The Energy Select Sector SPDR ETF (XLE), the broader energy industry ETF, has produced a -19% return, and SLB’s peer Halliburton (HAL) has also underperformed SLB, producing a -16% one-year return, net of dividends.

SLB also significantly outperformed the US rig count, which fell by 59% during the past year. Schlumberger has, however, underperformed the SPDR S&P 500 ETF (SPY), which has returned -1% during the same period.

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How correlated are Schlumberger and crude oil prices?

The correlation coefficient between Schlumberger’s stock price and crude oil prices from March 2015 to March 2016 is 0.58. This indicates a relatively strong degree of correlation between crude oil prices and Schlumberger’s stock prices. Still, limited multi-client seismic license sales in North America, reduced exploration, and lower deepwater activity are still major concerns of SLB. To top it off, Schlumberger’s net debt has increased in view of the pending Cameron International acquisition.

On the other hand, Schlumberger is expected to generate steady free cash flow in 2016. The fact that SLB provides technology, integrated project management, and information solutions in approximately 85 countries also helped manage the industry downturn better than many other OFS companies. So despite challenges, Schlumberger may be expected to perform steadily in the medium-to-long term.


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