VALUATION HIGHLIGHTS

1. Drilling constitutes 46% of the Trefis price estimate for SLB's stock.
2. Res. Characterization constitutes 18% of the Trefis price estimate for SLB's stock.
3. Production constitutes 18% of the Trefis price estimate for SLB's stock.

WHAT HAS CHANGED?

SLB Q3 Snapshot

SLB delivered strong third-quarter results with continued margin expansion, achieving an adjusted EBITDA margin of 25.6%. Its revenue was flat sequentially at $9.2 billion - indicating a more cautious approach to discretionary short-cycle spending due to commodity price pressures. North American revenue growth was constrained by lower drilling activity in U.S. land, impacted by gas prices and capital discipline by operators. Well construction revenue decreased 3% sequentially due to lower rig count in U.S. land and Saudi Arabia. The macro-environment remains challenging, with commodity prices under pressure and uncertainty around OPEC+ supply releases. That said, SLB is well-positioned to benefit from long-cycle deepwater projects and capacity expansion projects in the Middle East, which remain economically favorable.

The company anticipates muted revenue growth in the fourth quarter, with potential budget exhaustion in US land and cautious spending from international customers.

Note: SLB FY'23 ended on December 31, 2023. Q3 FY'24 referees to the quarter that ended on September 30, 2024.

Schlumberger Changing its Name to SLB

The rebranding includes a new logo and focuses on creating and scaling new energy systems such as carbon solutions, hydrogen, geothermal and geo-energy, energy storage, and critical minerals.

In 2020, the company launched a business unit to explore low-carbon and carbon-neutral technologies. The following year, the company said it wanted to achieve net-zero greenhouse gas emissions by 2050, with minimal reliance on offsets. The company has since rolled out new offerings to reduce carbon dioxide and methane emissions from oil-and-gas operations.

BUSINESS SUMMARY

SLB provides upstream reservoir characterization and drilling and exploration services for the oil and gas industry. SLB's services are required by integrated oil companies such as Exxon Mobil, National Oil Companies (NOCs) like Saudi Aramco, and independent producers to explore, develop, and service their oil resources. The company has an extensive geographical reach, conducting business in over 80 countries and providing products and services for oil and gas exploration, including seismic services, drilling, and post-drilling services.

KEY TRENDS

High Oil Prices Pushing Drilling Demand

Oil prices started plummeting in mid-2014 due to the demand-supply mismatch in the global oil markets. This resulted in weaker oilfield service activity throughout 2015 and 2016, as oil and gas companies curtailed upstream spending due to falling cash flows. This severely hit the business of oilfield services companies till 2019. Then, the impact of the COVID-19 pandemic hammered the oil industry in 2020, as governments closed businesses and restricted travel. However, oil prices saw a rebound on the news of the planned rollout of multiple COVID-19 vaccines by the beginning of 2021.

Oil prices rose early in 2022 as a surprising economic rebound drove demand for oil after several months of lockdowns. Secondly, the supply was not able to respond to increased demand as OPEC was probably cautious not to oversupply the market again, and the fact that oil production has long investment cycles. Lastly, the oil prices also increased sharply due to the conflict in Ukraine and sanctions on Russia. In 2023, Crude oil picked up on expectations of tighter supply ever since Saudi Arabia and Russia extended their voluntary output cuts of a combined 1.3 million barrels per day (bpd) to the end of the year 2023 - in order to support prices. This pushed oil prices to highs seen in November 2022 in late September, before macroeconomic concerns pulled them dramatically lower again. In the latest development, geo-political tension between the Islamist group Hamas and Israel poses one of the most significant risks to oil markets since Russia's invasion of Ukraine in February 2022. While oil flows have not yet been affected, there could be major implications if the conflict escalates. There is a possibility that the U.S. could tighten or step up enforcement of sanctions on Iran, which could further strain an already undersupplied oil market.

Given the growing geopolitical uncertainty due to the Russia-Ukraine and Israel-Hamas war, energy prices are likely to remain elevated in the near term. Thus, demand for oil field services is likely to remain high for a couple of quarters.

Exploration of deepwater and other remote sources of oil and gas

Increasingly over the past few years, significant oil and gas finds have been in deepwater and other remote locations such as the CIS and Iraq. The exploitation of these sources adds tremendous logistical and technical complexities to the exploration projects, which translates into higher revenues and lower competition for upstream products and services firms such as SLB. Additionally, projects such as deepwater provide opportunities for longer-term contracts and the ability to provide integrated services.

New oil and gas discoveries in Brazil and other Latin American countries

Several of the largest oil and gas discoveries in the past five years have been in Latin America, including several multi-billion-barrel offshore finds in Brazil. These discoveries are attracting investments from local oil companies such as Petrobras, as well as foreign oil majors such as Chevron and PetroChina. Exploration in this area is expected to improve SLB's revenue and profit outlook in the region.

Exploration for unconventional sources in Europe, Latin America, the Middle East, and Asia

Exploration for unconventional sources such as shale and tight gas is expected to pick up in Argentina, Mexico, Poland, China, and Saudi Arabia over the next several years, resulting in higher revenues and operating profits for SLB in these regions.

U.S.Oil Production

In Q4 2023, the average production level in the U.S. amounted to 13.22 mb/d, according to the EIA report. Such a rapid increase in production is due to higher oil production per well, as well as the use of drilled but uncompleted wells (DUCs). EIA forecasts U.S. oil production to turn to steady growth in 2025 at a faster pace compared to the 2024 forecast.

Efforts to arrest decline rates in aging fields

Oil firms are investing in technology to help them reduce the decline rates seen in major fields over their lifetime. For instance, Mexico's Pemex has been engaged in efforts to arrest the decline in its Canterall fields, while Saudi Aramco has also made it a priority to reduce the decline in its fields by 2-3% per year.