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, [email protected]
Praveen Narra, (713) 278-5288, [email protected]
[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.
