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Schlumberger versus Weatherford: A Peer Valuation Comparison

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Comparable company analysis

Schlumberger (SLB) is the largest company by market capitalization among our set of select OFS (oilfield services and equipment) companies. Weatherford International (WFT) is the smallest of the lot by market capitalization.

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Peer valuation comparison

Schlumberger’s EV (enterprise value, or approximately the summation of its equity value and net debt), when scaled by TTM (trailing twelve months), to adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is lower than that of WFT. WFT’s TTM-EV-to-EBITDA multiple is the highest of the group.

Forward EV-to-EBITDA

The 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 less than WFT’s.

SLB’s forward EV-to-EBITDA multiple expansion is also lower than the peer average in the group. This is because the expected drop in SLB’s adjusted operating earnings, or EBITDA, in 2016 has been less extreme than those of WFT and other peers. This should typically reflect in higher current EV-to-EBITDA multiple. So SLB could be undervalued based on EV-to-EBITDA multiple while WFT could be overvalued.

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Debt levels and PE ratios

Schlumberger’s debt to equity multiple is lower than the group average. WFT’s net debt to equity ratio is the highest in our group. A higher multiple could indicate elevated credit riskiness. This is concerning, particularly when crude oil prices are volatile.

Schlumberger’s valuation expressed as a PE (price-to-earnings) multiple, at 30x, is higher than its peer average in the group. Its forward PE multiple expansion reflects more extreme earnings decline compared to its peers. This, however, should typically reflect a current valuation discount over the peer average.

Analysts expect negative earnings for WFT for the next four quarters.

Outlook

In the next three to five years, analysts expect a healthy ~7% and 10% earnings growth for Schlumberger and Weatherford International, respectively. But, it remains to be seen whether WFT can come out of its debt woes successfully if energy prices remain subdued for longer.

Notably, SLB makes up 8.4% of the Energy Select Sector SPDR ETF (XLE). The energy and equipment services industry makes up 16.7% of XLE.

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