Analyzing Schlumberger’s Restructuring Plans



Schlumberger’s returns

From February 28, 2017, to February 27, 2018, Schlumberger’s (SLB) stock price declined nearly 17%. Since the beginning of 2018, Schlumberger has decreased ~4%. In the past year, Baker Hughes, a GE company (BHGE), saw its stock price decrease 36%. Flotek Industries’ (FTK) stock price declined 54% during the same period.

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OIH versus the market

From February 28, 2017, to February 27, 2018, the VanEck Vectors Oil Services ETF (OIH) fell 24%. OIH is an ETF tracking index of 25 OFS (oilfield equipment and services) companies. In the past year, the SPDR S&P 500 ETF (SPY) rose 16% until February 27, 2018. Since February 28, 2017, the Energy Select Sector SPDR ETF (XLE) has dropped 4%.

Schlumberger and crude oil prices

In the past year, Schlumberger outperformed the industry ETF, while it underperformed the broader market index. Crude oil prices have strengthened in the past year. From February 28, 2017, until February 27, 2018, the West Texas Intermediate crude oil price increased ~17%.

Higher crude oil prices could lead to higher energy production, which could benefit OFS companies like Schlumberger and ION Geophysical (IO). To learn more, read Top 5 OFS Companies Based on 2017 Returns.

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Why did Schlumberger adopt an asset-light model?

Recently, Schlumberger identified that its seismic acquisition business product line wouldn’t meet the company’s return expectations. Schlumberger’s customers aren’t willing to pay a premium for differentiated seismic measurement and surveys services. The services suffer from industry overcapacity. So, management decided to exit the marine and land seismic acquisition market. During 4Q17, Schlumberger decided to cease all future marine seismic acquisition activities.

Regarding business restructuring, Paal Kibsgaard, Schlumberger’s chairman and CEO, said, “Going forward, WesternGeco therefore adopts an asset-light model built on our strong multi-client, data processing and interpretation businesses, and further supported by our close partnerships with a leading company in cloud and high-performance computing. As a result, our reconstituted seismic business will going forward require half the capital investments and yield twice the free cash flow conversion and making it accretive to the cash returns of the company.” As a result of WesternGeco’s seismic restructuring, Schlumberger incurred a total of $1.1 billion pre-tax charges in 4Q17.

In this series

In this series, we’ll discuss Schlumberger’s relative valuation multiples and other market indicators. We’ll start with Schlumberger’s historical valuation multiples.


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