WFRD - SLB Steps Up To New Environment

2023-10-11 09:56:31 ET

Summary

• SLB's market capitalization is $83.3 billion. Its dividend yield is 1.7% and it has a buyback program.
• Of its 2Q23 revenue, 78% was from international operations; the remaining 22% from North America.
• Capital investment in oil drilling is increasing and is shifting toward international operations, SLB’s strength.

Market capitalization of SLB Limited ( SLB ) (formerly Schlumberger), is $83.3 billion, up by 61% from $51.9 billion at last review fourteen months ago. The dividend yield is a minor 1.7% although the company also has a modest buyback program in place.

SLB just closed the OneSubsea joint venture with Aker Solutions and Subsea7.

It benefits from global diversification, and is the largest oilfield services firm, an important factor as countries like Saudi Arabia look to allocate $100 billion for drilling in 2023-2025.

Should SLB choose to re-enter the US onshore oilfield services market at scale in areas like pressure pumping it is more likely to do so in 2025 or later. Its strengths are in large, international, and offshore hydrocarbon projects.

I own shares of SLB. I recommend its stock to energy investors interested in capital appreciation from international oilfield services growth.

OneSubsea Joint Venture

Earlier this month SLB, Aker Solutions, and Subsea7 closed their OneSubsea joint venture. As the name suggests, the joint venture is oriented toward making subsea production more innovative and efficient. SLB owns 70% of OneSubsea, Aker Solutions owns 20%, and Subsea7 owns 10%.

What this also means, is that, per the announcement, “OneSubsea now comprises SLB’s and Aker Solutions’ subsea businesses.”

The joint venture will be headquartered (appropriately, jointly) in Oslo, Norway and Houston, Texas.

Liberty Energy Agreement

In 2020—an unbelievably dire year financially for the energy sector--SLB sold its OneStim onshore pressure pumping business to Liberty Energy ( LBRT ) in exchange for 66.3 million Class A shares of Liberty, over a third of Liberty’s equity. Early in 2023 , Liberty completed the buyback of all these shares, so SLB no longer has an equity interest in Liberty. However, under the terms of their 2020 Master Transaction Agreement SLB will not “engage in any business or enterprise that is competitive with OneStim within onshore United States and Canada” without the prior written consent of Liberty until after December 31, 2024.

With no remaining equity interest in Liberty, SLB cannot nominate new members to Liberty’s board; however, its previous nominees, Simon Ayat and James McDonald, are expected to remain on Liberty's board until their terms are complete or until Liberty’s Nominating and Governance Committee requests they resign.

SLB Second Quarter 2023 Results and Guidance

SLB’s second-quarter 2023 revenues derived 78% from international operations and 22% from North America. In the second quarter, the company earned:

*$8.1 billion of revenues, a 5% sequential increase and a 20% year-over-year increase

*$1.03 billion of net income ($0.72/share)

*adjusted EBITDA of $2.0 billion at a 24.2% margin

*pretax segment operating income of $1.58 billion at a 19.5% margin.

SLB is organized by four operating divisions and four geographical regions. Operating divisions are 1) digital & integration, 2) reservoir performance, 3) well construction, and 4) production systems. The company’s second-quarter pretax operating income by division, with margin, is shown below.

The importance of the European and the Middle East/Asian operations are illustrated in the graph of 2Q23 revenue by region.

Discussing growth, in its 2Q23 conference call CEO Olivier Le Peuch noted that international revenue was 80% of the company’s global portfolio and offshore about half of that. He said, “In the international markets, the investment momentum of the past few years is accelerating. This is supported by resilient long-cycle development in Guyana, Brazil, Norway and Turkey; production capacity expansions in the Middle East, notably in Saudi Arabia, UAE and Qatar; the return of exploration and appraisal across Africa and the Eastern Mediterranean; and the recognition of gas as a critical fuel source for energy security and the energy transition.”

For example, Le Peuch also outlined expectations that between 2023 and 2025, Saudi Arabia would allocate nearly $100 billion to upstream oil and gas capital expenditure, a 60% increase from the previous three years, as they seek to reach maximum sustainable production capacity of 13 million BPD by 2027.

Macro Trends

A few factors in energy pricing:

*Interest rate increases, or at least a lack of decreases, remain on the horizon for the next several months.

*The anti-hydrocarbon Biden administration has limited the five-year US offshore leasing schedule to just three auctions, the least ever. This continues the Biden administration’s pattern of imposing limits on US drilling.

*A factor likely to exacerbate US oil price moves is Biden administration sales of 260 million barrels of oil of the Strategic Petroleum Reserve, a significant reduction. At full capacity, the US SPR holds just over 600 million barrels, or about a month’s worth of US oil consumption at 20 million barrels per day ((MMBPD)) of consumption.

*It is worth noting US' own oil production is now about 13 MMBPD, up from as little as 5 MMBPD in 2005 due to the increase from onshore US shale production in areas like the Permian, Bakken, and Eagle Ford.

Oil and Gas Prices

The October 10, 2023, Brent NYMEX oil futures price (for December 2023 delivery) was $87.72/barrel. On October 10, 2023, for November delivery:

*West Texas Intermediate ((WTI)) oil price was $85.97/barrel,

*Henry Hub (Louisiana) natural gas price was $3.38/MMBTU, and

*Dutch Title Transfer Facility ((TTF)) liquefied natural gas price was $15.39/MMBTU.

Prior to the invasion of Israel by Hamas, the EIA’s 5-95 confidence interval for future oil prices was $40-$140/bbl by year-end 2024.

Competitors

SLB’s main US office is in Houston , Texas; however, it is administratively headquartered in Paris, France and its 2Q23 conference call was scheduled on Greenwich Mean Time.

SLB’s largest oilfield service competitors are Baker Hughes ( BKR ), Halliburton ( HAL ), and NOV Inc. ( NOV ). As a leading oilfield services provider to national oil companies (NOCs), it also competes with Middle East/North Africa oilfield service company National Energy Services Reunited ( NESR ).

Smaller offshore oilfield services competitors are Weatherford ( WFRD ), Transocean ( RIG ), and Tidewater ( TDW ).

As noted above, SLB’s agreement with Liberty Energy limits SLB from competing with the former OneStim business (mainly North American onshore pressure pumping) it sold to Liberty until after December 31, 2024.

Governance

Institutional Shareholder Services ((ISS)) ranks SLB’s overall governance on October 1, 2023, as a very good 2, with sub-scores of audit (5), board (3), shareholder rights (5), and compensation (2). On the ISS scale, 1 represents lower governance risk and 10 represents higher governance risk.

Shorted shares were 1.5% of floated shares at September 15, 2023, and insiders own a tiny fraction (0.20%) of the outstanding stock.

At 1.79, SLB’s beta is quite high given the company’s large size: its stock moves directionally with the overall market but with far more volatility. However, this reflects the large supply and demand uncertainties in the global oil services sector.

At June 29, 2023, much of SLB’s stock was held by institutions, some of which represents index fund investments that match the overall market. The four largest institutional holders were Vanguard (9.1%), BlackRock (7.5%), State Street (5.9%), and Capital World (3.0%).

BlackRock, State Street, and Capital World are signatories to the Net Zero Asset Managers initiative, a group that, as of June 30, 2023, manages $59 trillion in assets worldwide and which (despite less energy supply due to reduced Russian exports to Europe) limits hydrocarbon investment via its commitment to achieve net zero alignment by 2050 or sooner.

Financial and Stock Highlights

At the October 10, 2023, closing price of $58.62/share, SLB’s market capitalization is $83.3 billion.

The 52-week price range is $41.10-$62.12 per share, so the closing price is 94% of the 52-week high and 87% of the average one-year target of $67.61/share.

Trailing twelve-months’ ((TTM)) earnings per share ((EPS)) is $2.73 for a current price/earnings ratio of 21. The average of analysts’ estimates for 2023 and 2024 EPS is $2.98 and $3.67 respectively, giving a forward price/earnings ratio range of 16.0 to 19.7.

TTM EBITDA, cash flow, and levered free cash flow were $6.73 billion, $5.12 billion, and $1.52 billion respectively.

TTM return on assets and equity were 7.1% and 22.5% respectively.

At June 30, 2023, SLB had $25.9 billion in liabilities—of which $11.3 billion was long-term debt--and $44.8 billion in assets resulting in a liability-to-asset ratio of 58%. This is down (improved) from 61% a year ago.

The company’s debt/EBITDA ratio is 2.0 and its debt/market capitalization is 0.16.

SLB’s dividend of $1.00/share yields 1.7%. It increased the quarterly dividend rate 40% in February 2023, although the rate is still half what it was in early 2020 ($2.00/share), before the energy market downturn.

SLB has a share repurchase program and bought back $213 million (4.5 million shares) during 2Q23. In its 2Q23 investor call, SLB's chief financial officer, Stephane Biguet, said the company had committed to return $2 billion to shareholders in 2023 between dividends and buybacks. At the current dividend rate, this would be about $1.4 billion in dividends and $600 million in buybacks.

Book value per share is $13.09, less than a quarter of the current market value per share.

Mean analyst rating is a 2.1, or “buy,” from 37 analysts, with at least one analyst calling the stock fairly valued.

However, the ratio of enterprise value to EBITDA is 13.8, above the level of 10.0 or less that would suggest a bargain.

SLB’s 3Q23 earnings call will be October 20, 2023.

Positive and Negative Risks

SLB’s major medium-term exposure is to changes in oil and natural gas prices and thus changes in worldwide drilling budgets.

As an international operator, it has political risk in every country in which it operates, including the US.

SLB’s dividend yield alone, excluding share repurchases or stock price appreciation, is not competitive with rates near or above 5% for 2-year Treasuries.

Recommendations for SLB Limited

Although the company has a share buyback program as well as a modest dividend, it is not recommended to dividend investors. Other companies are more generous.

The company has a very good governance score, but the stock is not a bargain—near its 52-week high, a ratio of enterprise value to EBITDA of 13.8, and a forward price/earnings ratio of 16.0-19.7.

However, SLB’s stock has seen good appreciation. It has steadily paid down debt. Its growth prospects are exciting, particularly as large capital expenditures shift from North America onshore to international offshore, SLB’s forte.

And now, given the growing recognition of the long-term importance of hydrocarbons in the energy mix, I recommend SLB to growth investors interested in globally diversified, large-scale oilfield services.

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