SLB’s Perspective in Q1: KEY Takeaways

SLB’s topline and EBITDA margin contracted in Q1, but they can improve in Q2 due to a robust pipeline of projects in subsea and higher demand for surface production systems, completions, and artificial lift in international markets. However, onshore challenges in the US and the adverse effects of the tariff structure can create uncertainty in the short-term results.

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The Market Outlook

We have already discussed SLB's (SLB) Q1 2025 financial performance in our recent article . Here is an outline of the macro energy environment and the company’s strategies in a changing scenario. SLB anticipates a deterioration in the balance between oil demand and supply and an impact from the recent tariff hike. The OPEC’s recent decision to increase crude oil production, coupled with lower demand scenarios, does not portray a positive spin for the crude oil price. In such a situation, the global upstream investment can decline in 2025 compared to 2024. However, the fall would be sharper in North America than in international regions like the Middle East and Asia.

The policy changes with respect to tariffs have created an air of uncertainty, which has made it more challenging to fully assess their impact. The company estimates that 80% of its revenue is derived from international markets and a diversified supply chain network. Its supply chain includes in-country manufacturing and local sourcing. So, it is exposed to increasing tariffs from imports of raw material in the Production Systems division, as well as exports from the U.S.

Key Strategies

The costs will be particularly high for trades between the US and China. To mitigate the effects, SLB can optimize its supply chain and manufacturing network. It may also pursue exemptions and drawbacks. It will likely engage with customers to recover tariff-induced cost increases through contractual adjustments.

Outlook – Q2 2025

Assuming tariff hikes remain unchanged and oil prices remain approximately at the current level, SLB expects revenues to remain “flat sequentially”, excluding the impact of the potential ChampionX acquisition. Its adjusted EBITDA margin can expand by 50-100 basis points in Q2, anticipates the company.

SLB's Q1 Performance Drivers

Our short article discussed SLB's revenue drivers for the operating divisions and key geographic regions. Its Production Systems saw steady revenue growth and margin expansion following strong demand for surface production systems, completions, and artificial lift. In subsea, SLB has a “constructive” outlook as a result of a robust pipeline of projects. It also expects the realization of cost synergies within the OneSubsea joint venture.

In Reservoir Performance, revenues and EBITDA margins suffered in Q1 as several new projects faced challenges and operational cost overruns. However, demand for unconventional stimulation in international markets remains high. The Well Construction segment faced headwinds due to lower drilling activity in North America and international markets. The Digital & Integration segment, on the other hand, experienced growth in Q1 due to accelerating adoption of digital and AI solutions through the upstream lifecycle.

A key highlight of SLB’s recent digital initiatives is the engagement with hyperscalers for the development of data centers. This resulted in a significant contract award in manufacturing services and modular cooling units. It continues to expand its technological offerings with low-carbon solutions.

In Q1, SLB spent $2.3 billion on the accelerated share repurchase transaction (ASR). The program reduced its shares outstanding by 56.8 million. The ASR transaction, together with the dividend increase in early 2025, will fulfill its commitment to return ~$4 billion to shareholders in 2025. Read more about SLB’s Q1 results, including cash flows and balance sheet, in our article here.

Relative Valuation

SLB is currently trading at an EV/EBITDA multiple of 7.0x. Based on sell-side analysts' EBITDA estimates, the forward EV/EBITDA multiple is 6.6x. The current multiple falls short of its five-year average EV/EBITDA multiple of 11.8x.

SLB's forward EV/EBITDA multiple versus the adjusted current EV/EBITDA is expected to contract more steeply than its peers because the company's EBITDA is expected to increase more sharply 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 lower than its peers' (HAL, BKR, and FTI) average. So, the stock is slightly undervalued compared to its peers.

Final Commentary

SLB's management sees increased uncertainty in the energy market. Upstream investment can decline in 2025, primarily in North America. Higher tariffs can raise SLB’s operating costs in the Production Systems division. So, it will aim at strengthening the supply chain and manufacturing network. However, several new projects face challenges and operational cost overruns, while lower drilling activity can adversely affect its Well Construction segment.

SLB’s views are more optimistic regarding subsea operations due to a robust pipeline of projects. It is also expecting stronger results in new energy due to higher energy demand from AI and data centers, carbon capture and sequestration technologies, and related fields. It has accelerated the share repurchase program and will focus on capital discipline and strong cash flow generation. The stock is undervalued compared to its peers.

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