SLB’s Q4 Outlook
In our recent article, we have already discussed SLB’s (SLB) Q2 2023 financial performance. Here is an outline of its strategies and outlook. Recently, SLB has benefited from renewed investment in the offshore markets in Africa, Brazil, and Scandinavia. The company’s joint venture with Aker Solutions and Subsea7 (OneSubsea) is poised to reap the offshore market growth. However, its performance in North America is less noteworthy as activity tapered off in this region.
In Q4, SLB will see increased contribution from the Digital and Production Systems segments, resulting in “high-single digits” sequential revenue growth. The Aker subsea business can account for most of its revenue growth in Q4 ($400 ml-$500 ml). Pre-tax margin, however, can remain unchanged compared to Q3. Investors may note that its operating margin is close to its highest over the past 12 quarters following improved operating leverage and technology adoption.
2023 Outlook and Strategy By Business
Excluding OneSubsea, SLB’s revenues (organic growth) can reach 15% in FY2023 compared to FY2022. Its EBITDA can increase by “mid-20s” in the year. Although North America will continue to pose a challenge, robust performance in the international markets can more than offset the headwinds.
Core Business: SLB’s management considers its core business of oil & gas to be in a “multiyear growth cycle,” which will drive long-cycle developments, production capacity expansions, and exploration activities. One notable feature of the cycle is recognizing natural gas as a fuel source in the energy transition process. As a result of the upcycle, SLB has significantly benefited from improved margins in the Production Systems, led by subsea, surface, and artificial lift. Its Well Construction activities also did well in Q3.
Subsea has been the highlight of SLB’s growth in recent times as various FIDs extend beyond 2025. It has focused on subsea multiphase boosting and subsea gas compression and will further enhance these operations with electrification and digital solutions. Its partnerships with other subsea majors will likely help unlock reserves, drive efficiency, reduce cycle times, and reduce emissions in the deepwater market.
Other Businesses: SLB’s customer additions in the Digital operations have been spectacular, with a 49% increase in users over the past year. The use of its autonomous drilling solutions also increased significantly. It has recently signed two contracts – one with Shell/AWS on a collaborative agreement and two with the Kuwait Energy Basra Limited digital oilfield contract. As a result of these initiatives, its digital technology offering witnessed a CAGR of 60%.
In the new energy initiatives, SLB is currently involved in more than 20 CCUS projects globally. It seeks opportunities to address fugitive methane and flaring reductions. It has recently launched an IoT-enabled methane point instrument for monitoring and other related operations. Read about SLB’s other key projects and contracts in our short article.
SLB’s Q3 Performance
The Digital & Integration segment saw the sharpest quarter-over-quarter revenue rise in Q3 (4% up), while revenues in the rest of the segments increased by 2%. The company’s adjusted EBITDA increased by 6% in Q3 compared to Q2.
Pre-tax operating income margin declined by 200 basis points from Q2 to Q3 in the Digital & Integration segment due to lower profitability in the APS following lower commodity prices in Canada. The operating margin in the Reservoir Performance segment expanded by 190 basis points in Q3 due to higher activity, pricing, and improved operating leverages in evaluation and stimulation.
In Well Construction, the operating margin expanded by 38 basis points due to strong activity in Europe & Africa and the Middle East & Asia. On the other hand, Production Systems saw a 147 bps sequential margin growth in Q3, led by improved profitability in various operations, better pricing, and removing supply chain constraints.
Cash Flow & Balance Sheet
SLB’s cash flow from operations increased by 72% in 9M 2023 compared to a year ago. Its FCF more than doubled over this period. Debt-to-equity (0.67x) decreased, too. In FY2023, it expects capex to range between $2.5 million and $2.6 billion, higher than the $2.2 billion recorded a year earlier. Higher capex can result in lower free cash flow (or FCF).
SLB’s net debt was reduced by $731 million from Q2 to Q3. HAL’s debt-to-equity was 0.67x in Q3, higher than its peers’ (HAL, BKR, and FTI) average. As of September 30, 2023, SLB completed repurchasing $1.6 billion of its common stock under a $10 billion share repurchase program.
Relative Valuation
SLB is currently trading at an EV/EBITDA multiple of 12.47x. Based on sell-side analysts’ EBITDA estimates, the forward EV/EBITDA multiple is 10.9x. The current multiple exceeds its five-year average EV/EBITDA multiple of 11.8x.
SLB’s forward EV/EBITDA multiple contraction versus the adjusted current EV/EBITDA is steeper than its peers because the company’s EBITDA is expected to increase more steeply than its peers in the next four quarters. This typically results in a higher EV/EBITDA multiple than its peers. The stock’s EV/EBITDA multiple is higher than its peers’ (HAL, BKR, and FTI) average. So, the stock is reasonably valued versus its peers.
Final Commentary
SLB has re-affirmed its industry outlook in the Q3 call as that of a “multiyear growth cycle” in its core business of oil & gas. The international offshore markets have been abuzz with investments, where a joint venture with Aker Solutions and Subsea7 (OneSubsea) is poised to reap the benefits. Subsea has been the highlight of SLB’s growth in recent times as various FIDs extend beyond 2025. On top of that, increased contributions from the Digital and Production Systems segments can extend its revenue growth in Q4.
In other areas, SLB’s customer additions in the Digital operations have increased sharply, thus increasing its stake in the company’s revenue share. In the new energy initiatives, SLB is currently involved in more than 20 CCUS projects globally. So, the company has diversified its revenue base, which can mitigate the slowdown in its North American operations. The stock is reasonably valued compared to its peers.
