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Schlumberger kicks off earnings season with increased revenue and dividends

Schlumberger (ticker: SLB) released its fourth-quarter and full-year 2014 results on January 15, showing year-over-year revenue growth and announcing a 25% increase to dividends. The company said revenue growth was fueled largely by performance in North America where revenue grew 16%. The company’s Middle East & Asia operations increased by 10%. The company also reported that drilling activity in the Gulf of Mexico grew 12% from Q3’14. The Gulf is the site of several new projects coming online, and production volume is forecasted to reach an all-time high in 2016.

According to the press release put out by SLB, full-year 2014 revenue increased 7% to $48.6 billion from $45.3 billion in 2013. The North American segment increased to $16.2 billion from $13.9 billion, while total international revenue increased 4% to $32.1 billion from $30.9 billion. Paal Kibsgaard, CEO of Schlumberger, said: “Fourth-quarter results were led by record revenue in North America due to continued efficiency improvements and new technology uptake in pressure pumping land and by the recovery of activity in the U.S. Gulf of Mexico. In the international markets, growth was strongest in the Middle East & Asia Area, driven by record revenue in Saudi Arabia and Bahrain, robust activity in Kuwait and the United Arab Emirates, and year-end increases in product and software sales across the Area.”

In Europe, Commonwealth of Independent States (CIS) and Africa revenue fell by 7% sequentially and 5% from the same quarter in 2013. Schlumberger said this was due to weakness in the ruble, the onset of winter weather and lower oil prices.

The company’s production group posted revenue just shy of $5 million, according the company’s earning call. The impressive revenue from the production group represented a 5% quarter-over-quarter increase from Q3’14.The reservoir characterization group and drilling group both posted a 3% decline in margins over the same period.

Despite low oil prices narrowing the margins in Europe, CIS and Africa, the company’s overall performance was still positive. Q4 earnings per share (EPS) from continuing operations excluding charges and credits was $1.50. This represents respective increases of $0.01 and $0.15 from Q3’14 and Q4’13.

In the SLB’s earnings call, Simon Ayat, Executive VP & CFO of Schlumberger, said the company would be increasing its annual dividend by 25% to $2.00 a share. He also said in 2014 the company repurchased 47.5 million shares at an average price of $98.38 for a total of $4.7 billion while paying out almost $2 billion in dividends.

The net debt for the company at the end of Q4’14 was $5.4 billion representing an improvement of $458 million as compared to the end of Q3’14. Other significant liquidity events for SLB included $1.2 billion in CapEx and an improvement in working capital of almost $1 billion. Ayat said, “From a cash flow perspective, we generated $11.2 billion of cash flow from operations during all of 2014. During the same period we generated a pre-tax low of $6.2 billion. This represents a $700 million increase over 2015 and means that we converted 84% of our 2014 earnings excluding charges and credits into free cash flow.”

With regards to the current price environment, Ayat said, “In this uncertain environment, we continue to focus on what we can control and we have already taken significant steps to restructure and right size our business to match the reduced E&P investment levels.”

The company plans on reducing its 2015 capital guidance to $3.0 billion – 25% lower than 2014’s total of $4.0 billion.

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Analyst Commentary

Raymond James Equity Research 01.20.15

Schlumberger Ltd. - Outperform 2 - Target price = $95.00;
Companies Mentioned - SLB
SLB: 4Q14 Beat, But Unclear How Weak 2015 Will Be [SLB011915c_163707]
J. Marshall Adkins, (713) 789-3551, Marshall.Adkins@RaymondJames.com
Praveen Narra, (713) 278-5288, Praveen.Narra@RaymondJames.com
[Industry Classification: Energy/Oilfield Services]

Recommendation: Schlumberger's 4Q14 earnings came in ahead of expectations but total revenues and companywide margins were roughly flat sequentially. However, given the rapid deterioration in the oil markets, the 2015 outlook is more relevant. Unfortunately, the 2015 outlook is hazy at best, with management prudently opting to focus more on quarter-to-quarter changes. We are expecting Schlumberger to face a tough 2015 in our more bearish environment. However, international activity should be relatively stronger than North America, which is relatively more beneficial for Schlumberger. Despite the weak outlook and given the company's current valuation, we maintain our Outperform rating and $95 price target.

* North American weakness: Management suggested that North American E&P capex could be down 25-30%, based on spending surveys. However, we note that we are more bearish, expecting E&P capex down 35% y/y based on our current price deck. With that, we expect significant decremental margins of ~45%, better than in 2009 which reached north of 50%. Utilization and pricing across all segments will be severely impacted; however, we expect pressure pumping to be relatively stronger than drilling services. All in, we expect pricing to come down ~15% with regional revenues down 30% with a 1,130 bp margin loss in 2015.

* Beware of the Russian bear: We expect the Europe/CIS/Africa region to represent the weakest international region for Schlumberger. We expect activity will continue its decline in Angola and the North Sea, and continued weakness in Russia (including currency issues). Russia will likely present one of the weakest global nations in 2015, and we forecast the region's revenues will fall 18% y/y with margins dropping 460 bp average y/y. For reference, we are expecting a 9% decrease in Latin America and a 7% decrease in Middle East Asia Pacific (MEAP). Further, we expect margin decreases of 330 bp for Latin America and 150 bp for MEAP.

* Controlling what can be controlled: Schlumberger's investor day was filled with discussions regarding the company's internal transformations. With the current downturn, we expect these initiatives to be further emphasized. In reaction to the lowered activity outlook and the overall weakness in the market, Schlumberger reduced its capex to $3 billion from ~$4 billion. In addition, management has reduced headcount by 9,000 (out of 120,000) in order to better align with the current market.

* Estimates: For full-year 2015, we expect lower activity will drop EPS to $3.30. We expect operations to modestly recover in 2016, and we are modeling EPS of $3.50.

Valuation: Our $95 target price is based on a ~13x 2016E EBITDA multiple, above the 10-year average diversified peer range of 6-10x. We believe this high-end multiple is justified based on 2015 representing a trough year for earnings.  


Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.