- Schlumberger’s revenue estimate is upward trending in the next couple of years but may slow down after that
- EBITDA is also to remain steady in the next couple of years
- The stock is relatively overvalued at the current level
Part 1 of this article discussed Schlumberger’s (SLB) outlook, performance, and financial condition. In this part, we will discuss more.
Linear Regression Based Forecast
A regression equation-based model on the relationship among the crude oil price, global rig count, and SLB’s reported revenues for the past six years and the previous eight-quarters suggests revenues to increase in the next two years. However, revenues can decline in NTM (next 12-months) 2023.
Based on the average forecast revenues, the model suggests the company’s EBITDA will increase in the next two years. In NTM 2025, however. the EBITDA can decline sharply.
Returns potential using SLB’s forward EV/EBITDA multiple (11.9x) is lower (10% downside) than the returns potential using the past average multiple (8% upside). The Wall Street analysts have slightly higher return expectations (24% upside).
SLB’s forward EV-to-EBITDA multiple contraction versus the adjusted trailing 12-month EV/EBITDA is in line with the peers because the company’s EBITDA is expected to increase nearly as much as its peers in the next four quarters. This would typically reflect a similar EV/EBITDA multiple compared to the peers. The company’s EV/EBITDA multiple is higher than the peers’ (HAL, BKR, and FTI) average of 12.8x. So, I think the stock is overvalued at the current price.
What’s The Take On SLB?
Schlumberger’s management is relying on a multi-year upcycle. While the North American shale story firms up, it expects activities in the Middle East and international offshore activities to recover significantly in the medium term. Also, for the long term, it continues to deal with technological improvement (DELFI customers and the DELFI cloud platform) and investment in clean energy, consisting of low-carbon or carbon-neutral energy technologies. Its revenue growth in FY2022 can reach “mid-single-digits” and the operating margin expansion by 50 to 100 basis points in Q2 2022.
However, the global supply pressure, logistic constraints, and the Ukraine war will disrupt the energy sector’s growth path. SLB’s free cash flows deteriorated significantly in Q1. Because it pursues a low capital-intensive strategy, the low capital investment-to-revenue ratio will help improve cash flows by the end of the year. At the current level, the stock is overvalued compared to its peers. It can move sideways in the short term. Nonetheless, SLB’s balance sheet strength and strategic changes will power it forward over a more extended period.
