Improving Oil Price is Positive for Schlumberger Limited. (NYSE:SLB)
Schlumberger Limited. (NYSE:SLB) is grappling with the effects of one of the worst downturns in the energy sector, just like other companies in the oil services business. Uncertainty over where the sector is headed has forced a good number of oil and gas producers to scale back on all drilling activities. The result has been declining business for drilling companies.
Oil Prices Recovery
The impact of the cutbacks is already being felt, Schlumberger Limited. (NYSE:SLB) having reported a 26.3% and 60.8% plunge in revenue and earnings. However, a recent recovery in the oil price environment is already reinvigorating hope that the worst is over.
Oil prices have risen above the $40 a barrel mark, as industry experts remain confident of prices stabilizing above the $50 a barrel mark. The sentiments should be good news for drilling companies, which believe that the upward momentum could help fuel-drilling activities. Some companies are however maintaining cautious approach awaiting prices to stabilize.
Prices rising above $60 barrel according to Devon Energy Corp (NYSE:DVN) and Hess Corp. (NYSE:HES) could sway them to pursue new rigs.
International Markets Exposure
Such a run should especially benefit Schlumberger Limited. (NYSE:SLB) given its vast footprint in the international markets. Unlike other companies with operations in North America alone, the oil service giant boasts of an unparalleled network, spanning the Middle East and Russia.
Last year the Houston Texas based company generated 70% of its revenues overseas. A rebound in prices above the $50 a barrel mark should fuel drilling activity oversees, much faster than in North America.
Better Margins Overseas
Higher pricing power on international markets is what gives Schlumberger an edge in the oil services business. Unlike in North America, offshore jobs tend to be more service intensive. Such projects also tend to have a higher demand for technology and innovation one of the reasons why the oil services giant tends to enjoy higher margins.
Schlumberger Limited. (NYSE:SLB) has already proved how resilient it is, given the wave of uncertainty and headwinds that have clobbered the industry. The company has been able to generate enough cash to fund its capital expenditure as other companies resort to cutbacks. Free cash flow of $1.4 billion after capital expenses and dividends underlines how stable the company is.
The company’s 8.4% margins are unmatched in the industry as the likes of Halliburton Company (NYSE:HAL) and Baker Hughes Incorporated (NYSE:BHI) continue to grapple with -7% and -15.2% margins. Schlumberger Limited. (NYSE:SLB) should be the first oil service company to register a turnaround on oil prices stabilizing above the $50 a barrel mark.
Cameron Acquisition to Generate More Value
The acquisition of Cameron International further gives Schlumberger Limited (NYSE:SLB) edge in the industry. The acquisition has most of its equipment tied to subsea infrastructure and other offshore use. With a recovery in drilling activity expected to first occur overseas, the company stands to generate more incremental revenues as others await business to pick up in North America.
Schlumberger has already pointed out that it expects the integration of Cameron to result in a reduction in working capital by 25%. The same should go a long way in bolstering its margins as the recovery in the sector continues.
Schlumberger Limited. (NYSE:SLB) remains well positioned to be the biggest beneficiary of a rebound in oil prices in the oil services business. Improvement in offshore capital spending supplemented by a successful integration of Cameron International should help support the company’s fundamentals going forward.
Buying the stock at the current weakness will not be a bad move for investors looking to generate some long-term value at the back of an imminent turnaround.
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