With the pandemic causing a paradigm shift in energy demand, Schlumberger (NYSE: SLB) has restructured its organization to focus on digital solutions for the existing oil & gas industry and the budding renewable energy sector. As crude oil prices are expected to remain subdued for a couple of years, there is a rising demand for technology solutions to enhance asset productivity and reduce capital costs. In Q2 2020, Schlumberger signed an agreement with Exxon Mobil to jointly develop and implement digital drilling solutions. Later, Schlumberger partnered with Honghua Electric, a Chinese drilling equipment manufacturer, to integrate its DrillOps software with all new Honghua rigs. With the company identifying digital innovation and new energy as two areas of future growth, Trefis believes that SLB is a good pick to speculate on the technology solutions business. We highlight the historical trends in revenues, earnings, and stock price in an interactive dashboard analysis, Why SLB stock has lost 60% since 2017?
Digital Segment’s strong profitability attracting higher capital allocation
In 2020, the company’s new operating segments Digital & Integration, Reservoir Performance, Well Construction, and Production Systems contributed 13%, 23%, 36%, and 28% of total revenues, respectively. Reservoir Performance and Production Systems segments provide technology services for searching hydrocarbon reserves and real-time production management services to oil & gas companies, respectively. Due to sluggish oil demand in 2020, Reservoir Performance and Production Systems segments observed a contraction of 40% and 20%, respectively. While the two segments contribute more than half of Schlumberger’s top line, they received a comparable amount of capital investment as the Digital segment. In the past two years, SLB invested $4 billion with $1.4 billion allotted to the Digital & Integration segment, $1.5 billion to the Reservoir and Production Systems systems combined, and $1.1 billion to Well Construction. Looking at margins, the Digital & Integration, Reservoir Performance, Well Construction, and Production Systems reported a pre-tax operating margin of 24%, 6%, 10%, and 9%, respectively.
Weakness in crude oil and natural gas prices is the key concern for the oil & gas industry. However, declining commercial crude oil and natural gas inventories are a positive indicator for the industry. Moreover, the EIA expects the WTI benchmark and Henry Hub spot price to observe 30% and 40% growth in 2021, respectively. Currently oil, coal, and natural gas account for broadly 32%, 27%, and 24% of the global energy consumption, respectively. With industry leaders including Exxon, Chevron, BP, and Royal Dutch Shell enhancing their low carbon and renewable energy portfolio, the share of natural gas and alternative energy is expected to rise in the long run.
While SLB stock is trading at multi-year lows, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Atmos Energy vs. World Wrestling Entertainment shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.