BKR - Schlumberger: Time To Take Some Profit Off

2023-07-26 12:40:13 ET

Summary

• Schlumberger Limited reported second quarter 2023 adjusted earnings of $0.72 per share, beating once again analysts' expectations. It significantly increased from $0.50 per share a year ago.
• Schlumberger posted total quarterly revenues of $8,099 million, up from the year-ago quarter's $6,773 million.
• The balance sheet explains why I consider Schlumberger the best long-term investment in this industry.
• I believe the oilfield services sector is now overbought and it is perhaps time to sell a part of your Schlumberger position between $57.8 and $58.5, with a possible higher resistance at $59.5 in case of solid momentum.

Introduction

Houston-based Schlumberger Limited (SLB) released its second quarter 2023 results on July 21, 2023.

Note: I have followed SLB quarterly since December 2018. This article updates my article published on May 29, 2023.

Schlumberger is the last of the three selected oilfield services I follow regularly on Seeking Alpha and are part of my stock tracker. I strongly recommend reading my recent Baker Hughes (BKR) and Halliburton (HAL) articles about their 2Q23 results by clicking on the business name in blue.

1 - 2Q23 Results Snapshot

SLB reported second quarter 2023 adjusted earnings of $0.72 per share, beating once again analysts' expectations. It significantly increased from the $0.50 per share a year ago.

Also, Schlumberger posted total quarterly revenues of $8,099 million , up from the year-ago quarter's $6,773 million. Revenue was lower than expected.

However, It was a solid quarterly result, reflecting robust business activities in land and offshore resources in North America and Latin America. The company indicated that the North American segment will be slightly down in 3Q23.

Schlumberger's board of directors approved a quarterly cash dividend of $0.25 per share.

CEO Olivier Le Peuch said in the conference call:

Our second quarter results continue to demonstrate the strength of our portfolio and our strategic positioning in the most attractive, accretive, and resilient markets globally. This is translating to financial performance, and we closed the first half of the year with solid growth across revenue, earnings per share, free cash flow, and expanded EBITDA and pre-tax segment operating margins.

2 - Investment Thesis

SLB is my preferred company in the oilfield services segment due to its solid reputation and Worldwide expertise.

As I said many times, I find the oilfield services sector generally less rewarding than the E&P industry. Furthermore, companies in this segment offer an unattractive dividend compared to the high volatility attached to the industry.

This highly unpredictable segment can quickly turn from a successful investment to a more non-inspiring one without sufficient time to adapt to the new development.

The industry has turned bullish recently due to a solid oil environment but could quickly reverse course if any signs of weakness start to darken the horizon. The FED is about to raise interest again, which could trigger a selloff in the oil sector. This uncertainty explains why the industry has reached a strong resistance.

The chart below shows that oil and gas prices dropped significantly YoY.

Thus, the strategy for such a volatile environment is trading LIFO around a long-term position. Trading 50% of the entire position is the most adapted strategy with cyclical stocks. It protects you from excessive ups and downs and provides an extra gain non-negligible while waiting for a new rebound.

3 - Stock Performance

As shown below, Schlumberger has significantly outperformed Baker Hughes and Halliburton. However, SLB is up 63% on a one-year basis.

3 - 2Q23 Balance Sheet Snapshot: Schlumberger compared to Halliburton and Baker Hughes

As we can see below, SLB revenues are the most significant. I like SLB for its business spread worldwide and its moderate exposure in North America while strongly relying on the Middle East and Europe/Africa.

3.1 - Balance Sheet

3.2 - Revenues per Region

Halliburton North American revenue is the most significant and brings extra security but more risk exposure due to a lack of diversification.

Note: It isn't easy to compare BKR with HAL and SLB because of the larger revenue classified as other (Industrial & Energy Technology) for BKR that should be distributed to all the regions above.

Schlumberger Financials History Ending 2Q23 Trend And Raw Numbers

Source: Company release.

Revenues, Free Cash Flow, And Debt Analysis

1 - Quarterly Revenues were $8.099 billion at the end of June 2023

Schlumberger announced revenue of $8.099 billion in 2Q23, or a 19.6% increase YoY, down 4.7% over 2Q22. Net income was $1,033 million or $0.72 per diluted share, compared with $959 million or $0.67 in 2Q22. Revenue increase was mostly driven by the international markets led by the Middle East and Asia.

Adjusted earnings were $0.72 per share, which beat analysts' expectations, and Adjusted EBITDA was $1,962 million.

CFO Stephane Biguet said in the conference call:

Second quarter revenue increased 20% year-on-year as international revenue was up 21%, significantly outpacing North America revenue growth of 14%. The strong international growth was led by the Middle East and Asia and robust offshore activity.

1.1 Revenues per Region

Revenues were significantly higher sequentially, especially for the International business. However, all regions delivered a lower revenue QoQ, excluding North America, as shown below:

1.2 - Revenue per segment

2 - The Free Cash Flow was $1,137 million in 2Q23

Note: The generic free cash flow is the cash from operating activities minus CapEx. Schlumberger calculated the FCF differently and indicated $721 million. Schlumberger used a CapEx, including investments in APS projects and multi-client. I used a CapEx of $471 million.

Trailing 12-month free cash flow was $3,187 million, and 2Q23 free cash flow was $1,137 million from $48 million in 2Q22.

Schlumberger's board of directors approved a quarterly cash dividend of $0.25 per share or a dividend yield of 1.75%, which I consider too low.

Also, during the quarter, SLB repurchased approximately 4.5 million shares of its common stock at an average price of $47.33 per share for a total purchase price of $213 million .

3 - Net Debt increased sequentially to $10.14 billion at the end of June 2023

The long-term debt (including current) was $13,335 million at the end of June 2023, down from $13,847 million in 2Q22. Cash was $2,105 million this quarter.

CFO Stephane Biguet said in the conference call:

Our net debt reduced approximately $200 million sequentially to $10.1 billion, which is $900 million lower than the same period last year. Capital investments, inclusive of CapEx and investments in APS projects and exploration data, were $622 million in the second quarter. For the full-year, we are still expecting capital investments to be approximately $2.5 billion to $2.6 billion.

Technical Analysis and Commentary (SLB)

SLB forms an ascending triangle pattern, with resistance at $57.9 and support at $52 . RSI is 73 and signals an overbought situation, suggesting it is time to sell a portion of your position.

The ascending triangle, often referred to as the 'rising triangle', is one of the top continuation patterns that appears mid-trend. Traders anticipate the market to continue in the direction of the larger trend and develop trading setups accordingly.

As I said in my investment thesis, I suggest trading short-term LIFO for about 50% of your position. I recommend selling partially between $57.8 and $58.5 with a possible higher resistance at $59.5 in case of solid momentum.

Conversely, it is reasonable to accumulate when the stock experiences weakness between $53 and $50.5, with lower support possible at $49.

Trading LIFO is an excellent way of trading your long core position. It means that you are selling first your recent purchases and keeping your older position for a higher level. It will reward you with a much higher profit while reducing risk significantly.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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