Global oilfield services giant Schlumberger (NYSE:SLB) looks poised for a turnaround. Despite an 8.4% decline in the past year, significantly underperforming the S&P 500’s (SPX) 21% return, primarily due to weak sentiment in the energy and oilfield services sector, I remain bullish on the stock. I will buy SLB at its current levels because of the company’s appealing valuation, robust growth strategy, and positive outlook based on expectations of increased drilling activity and capacity expansions globally.
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Additionally, SLB’s digital growth initiatives are expected to play a pivotal role in driving future performance, adding another layer of optimism for potential investors.
Q4 Beat & Bullish Outlook
SLB’s Q4 adjusted earnings of $0.86 per share beat analysts’ estimates of $0.83 per share. Impressively, the company reported an earnings beat for the 16th consecutive quarter. In addition, total net revenue jumped 14% year-over-year to $8.99 billion and exceeded the consensus estimate of $8.96 billion. For FY2023, revenue grew 18% to $33.14 billion, with EBITDA growing by 25%.
Driving the quarterly beat was robust momentum in international and offshore markets, as well as digital initiatives and its joint venture with Aker Solutions and Subsea7. Notably, SLB is quickly making its foray into the digital and AI world. By adopting the latest technology, it aims to make operations autonomous and enhance efficiency in the oil fields across drilling and production and other major areas.
Importantly, International revenue remained robust and jumped 18% year-over-year, outperforming North American revenue, which remained flat. A slowdown in North American revenues is a point of concern for many investors. However, North America comprises just 20% of SLB’s business and is being offset by high-teens growth in international and offshore regions.
Positively, the company reaffirmed its bullish outlook for both FY2024 and beyond. For Fiscal Q1 2024, SLB expects low-teens growth in revenues and mid-teens growth in EBITDA. Further, management expects a rebound in activity during the second quarter, with accelerated growth coming in the second half of the year. Specifically, SLB expects the record growth in the Middle East to continue beyond 2025.
Importantly, during the earnings call, CEO Olivier Le Peuch pointed out huge growth potential based on robust final investment decisions (FIDs) globally. He stated, “We see the potential for more than $100 billion in global offshore FIDs in both 2024 and 2025, underscoring the enduring strength of the offshore markets and supporting a very favorable subsea outlook for years to come.”
He also highlighted that during FY2023, SLB reported better revenue and margin growth, as well as the strongest free cash flow generation ($4 billion) since 2015.
Impressive Dividends & Share Repurchases Backed by Solid Cash Flows
During Q4, SLB increased its quarterly dividend by 10% to $0.275. The dividend is payable on April 4 to shareholders of record on February 7. It’s worth noting that SLB’s dividends have more than doubled in the past three years. However, they remain much lower than the 50 cents levels maintained for the five years between 2015 and 2020. This implies that there is significant room for improvement in dividends in the coming quarters.
On top of that, the company plans to increase its current share repurchase program and plans to return $2.5 billion to shareholders during FY2024. This represents 3.5% of the current market cap. During FY2023, SLB returned $2 billion to its shareholders via dividends and buybacks, representing a 2.7% return.
It’s important to note that the company has ample cash flows to support the dividends and buybacks. During 2023, SLB registered a free cash flow yield of 5.6% of the current market cap, which is impressive. Furthermore, the company returned value to shareholders after reducing its net debt by $1.4 billion. This is extremely commendable and makes me more confident about the strong business fundamentals and solid cash flows.
SLB is Trading at an Attractive Valuation
SLB is currently trading at a forward P/E ratio of 14x, reflecting a huge 48% discount from its five-year average of 27x. The discounted valuation potentially presents a great buying opportunity for SLB, given the strong growth potential in revenue and earnings in the coming years.
Is Schlumberger a Good Stock to Buy, According to Analysts?
The Wall Street community is clearly optimistic about SLB stock. Overall, it commands a Strong Buy consensus rating based on 10 unanimous Buys. Schlumberger stock’s average price target of $68.60 implies an impressive 30.7% upside potential from current levels.
Conclusion: Consider Near-Term Weakness as a Buying Opportunity
SLB looks set for accelerated growth in the coming years, supported by a solid business strategy and an expected surge in international and offshore activity (offsetting lackluster growth in the U.S.). This momentum is further strengthened by its enhanced digital offerings and AI capabilities.
Therefore, I maintain a bullish outlook on the stock and view the near-term weakness as a compelling buying opportunity.
