Schlumberger: Zacks’ Bear of the Day Play

Schlumberger Limited (SLBAnalyst Report) doesn’t see the light at the end of the tunnel yet as energy production continues to plummet worldwide. This Zacks Rank #5 (Strong Sell) is expected to see another big earnings decline in 2016.

Schlumberger is one of the largest service providers to the oil and gas industry worldwide, providing project management in over 85 countries.

Big Production Decline in Q1

On Apr 21, Schlumberger reported its first quarter results and missed the Zacks Consensus by a penny.

But the big news with the energy companies is in the outlook.

The decline in global activity and the activity disruption reached “unprecedented levels” during the first quarter as the industry operated in a “full-scale cash crisis.”

E&P budgets were slashed again which impacted Schlumberger’s results. Revenue fell 16% quarter over quarter to $6.5 billion.

This was the steepest quarter over quarter decline in revenue during this oil crash.

North American revenue dropped 25% as the US land rig count declined 31%. International revenue fell 13% due to a combination of customer budget cuts, and rig count declines, activity disruptions, seasonal winter slowdown and the continuing pricing pressures.

Watching Supply and Demand Metrics

The US rig count has fallen 80% from the peak of October 2014. At some point, the demand will outweigh the supply, especially as the rig count globally continues to fall.

Schlumberger still sees steady demand growth, so it’s only a matter of time before supply and demand balance.

The company is still creating strong cash flow, even amidst the downturn, so it is returning it in the form of share buybacks and a dividend, which is still yielding a healthy 2.5%.

Estimates Lowered Again

With the outlook for a true rebound in drilling still several quarters into the future, the analysts have no choice but to lower earnings estimates to match the current reality.

8 estimates were cut for 2016 in the last week. It pushed the Zacks Consensus Estimate down to $1.28 from $1.64.

This is an earnings cut of 62% year over year.

You can really see how far the earnings are expected to fall when you see that just 90 days ago the analysts forecast Schlumberger to make $2.22 per share.

Analysts are also bearish on 2017 with 7 estimates being cut in the last 7 days. The 2017 Zacks Consensus Estimate now stands at $2.06, down from $2.37. It was $3.00 just 3 months ago.

Are Shares Cheap?

Shares are well off their winter lows.

While the recovery isn’t happening right now, it seems likely that we’re closer to it than further away and that’s why investors are jumping in.

With shares rising, but earnings estimates falling, they’re not exactly cheap. Schlumberger trades with a forward P/E of 62.5.

If you really want to buy in the oil services industry, the entire group has pretty low Zacks Ranks as earnings estimates continue to be cut.

But you might want to check out Carbo Ceramics (CRRSnapshot Report). It has already reported earnings and is a Zacks Rank #3 (Hold) even though earnings are still sliding there as well.

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Tracey Ryniec is the Value Stock Strategist for She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec and she also hosts the Zacks Market Edge Podcast on iTunes.


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