Schlumberger’s returns

In the period between August 2015 and August 2017, Schlumberger’s (SLB) stock price hit its peak in January 2017. Since then, SLB’s stock price has fallen nearly 27%. Since August 31, 2016, SLB has fallen ~20%. We discussed Schlumberger’s recent drivers in Schlumberger Sees Twists and Turns before Its Recovery.

In the past one-year period, Baker Hughes, a GE Company’s (BHGE) stock price has decreased 1%. BHGE is a smaller-cap peer of Schlumberger. Please read Market Realist’s Baker Hughes’s Weakness despite Synergy Opportunities to see how BHGE has performed after the deal with General Electric (GE).Will SPM Projects Drive Schlumberger’s Returns in 2017?

OFS stocks versus the market

Between August 2016 and August 2017, the VanEck Vectors Oil Services ETF (OIH) also dropped 20%. OIH tracks 25 oilfield equipment and services (or OFS) companies.

The Dow Jones Industrial Average (DJIA-INDEX) has increased 19% in the past one-year period. During the same period, the SPDR S&P 500 ETF (SPY) has risen 14%. Since August 2016, the Energy Select Sector SPDR ETF (XLE) has dropped 8%.

Schlumberger and crude oil

In the past one-year period, SLB has performed in line with the industry ETF but has underperformed the broader market index. Crude oil price’s movement partially explains SLB’s weakness. During 2016, the price of West Texas Intermediate (or WTI) crude oil made a strong recovery, rising 45%.

Led by burgeoning inventory levels, crude oil’s price has weakened in 2017. Year-to-date through August 31, 2017, WTI fell ~13%.

Lower crude oil prices can lead to lower energy production, which can negatively affect OFS companies like Schlumberger and Core Laboratories (CLB). You can read more about this topic in Will US Crude Oil Inventories Outweigh Harvey?

Schlumberger’s SPM projects

SLB’s first Schlumberger Production Management (or SPM) project started in 2014. SPM is a business model for field production projects. Currently, SLB manages 15 SPM projects in seven countries.

From 2011 to 2016, return on capital employed from the company’s SPM projects was 7% higher than the rest of SLB’s business. SPM projects’ long-term duration with a full cycle baseline of activity and revenues have resulted in higher returns.

In the past 12 months, Schlumberger has announced $390 million in SPM plans with energy producer YPF Sociedad Anonima (YPF) in Argentina, as well as $700 million in projects with FIRST E&P and NNPC in Nigeria.

Series highlights

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

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