What Could Drive Schlumberger’s Returns in 2H17 and Beyond?

Schlumberger’s returns

Between May 2015 and May 2017, Schlumberger’s (SLB) stock price was at its highest in June 2015. Since then, SLB’s stock price has fallen nearly 25%. Since May 31, 2016, however, SLB has fallen ~9%.

In the past one year, Baker Hughes’s (BHI) stock price has risen 19%. On May 31, BHI received European Commission’s clearance for the proposed transaction between Baker Hughes and GE’s (GE) oil and gas business. Read Market Realist’s GE to Partner with BHI? The Changing Oilfield Services Landscape to know more.

What Could Drive Schlumberger’s Returns in 2H17 and Beyond?

OFS stocks versus market

From May 2016 to May 2017, the VanEck Vectors Oil Services ETF (OIH) dropped 8%. OIH is an ETF tracking the index of 25 oilfield equipment and services (or OFS) companies. The Dow Jones Industrial Average (DJIA-INDEX) has risen 18% in the past one year. The energy sector makes up 6.1% of the DJIA-INDEX.

In the past one year, the SPDR S&P 500 ETF (SPY) has risen 15%. Since May 2016, the Energy Select Sector SPDR ETF (XLE) has dropped 2%. The energy equipment and services industry makes up 16% of XLE.

Schlumberger and crude oil prices

In the past one year, SLB has outperformed the industry ETF but has underperformed the broader market index. Crude oil prices partially explain SLB’s weakness. In 2016, the West Texas Intermediate (or WTI) crude oil price made a strong recovery, increasing 45% since the beginning of 2016. However, led by burgeoning inventory levels, crude oil prices have weakened in 2017. From January 1, 2017, until May 31, WTI has fallen 8%.

Lower crude oil prices can lead to lower energy production, which can negatively affect OFS companies like Schlumberger. Read more on this in Market Realist’s Oil Traders: Are Your Bullish Bets in Danger?

Schlumberger’s deal with Saudi Aramco

Recently, Saudi Arabia’s state-owned oil company Saudi Aramco reportedly signed deals worth $50 billion with US companies during President Donald Trump’s visit to Saudi Arabia. On May 20, 2017, SLB signed a memorandum of understanding with Saudi Aramco. Saudi Aramco has also signed a joint venture deal with National Oilwell Varco (NOV). However, not all of SLB’s international operations are in good shape, as we’ll discuss below.

Will international markets hold back SLB?

  • In the Middle East, SLB’s management doesn’t expect significant growth over the next few quarters.
  • In Latin America, SLB could find new opportunities as Petrobras (PBR) divests assets and focuses on mature onshore basins.
  • Overall, slower recovery and pricing weakness could drive upstream activity growth in late 2017 and 2018 in many international markets.

Series highlights

In this series, we’ll discuss SLB’s relative valuation multiples and other market indicators. We’ll start by looking at Schlumberger’s historical valuation multiples in the next part.