Why Schlumberger’s Earnings Beat Isn’t Helping the Stock

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Schlumberger Ltd. (NYSE: SLB) reported first-quarter 2018 results before markets opened on Friday. The oil field services firm reported adjusted diluted earnings per share (EPS) of $0.38 on revenues of $7.83 billion. In the same period a year ago, Schlumberger reported adjusted EPS of $0.25 on revenues of $6.89 billion. First-quarter results also compare to the consensus estimates for EPS of $0.37 on revenues of $7.81 billion.

Net income in the quarter totaled $525 million, up from $279 million in the same period a year ago. In the fourth quarter of 2017, Schlumberger took one-time charges of $2.21 billion mostly due to a restructuring of its Western Geco business.

The company noted that its effective tax rate in first quarter was 17.6%, compared with 19.0% in the fourth quarter of 2017. Because the company is based in Curaçao, it pays taxes in the countries where it operates without incurring additional taxation in the United States. Thus, the impact of U.S. tax law changes are not expected to have much effect, and the company said it believes its effective U.S. tax rate for this year will be about 19%.

CEO Paal Kibsgaard is optimistic about demand for the company, both for 2018 and 2019. There are, however, some concerns:

[T]he worldwide production base has started to show the anticipated signs of weakness with noticeable year-over-year production declines appearing in several countries such as Angola, Norway, Mexico, Malaysia, China, and Indonesia. With Libya and Nigeria producing at near-full capacity, Venezuelan production in free fall, the potential of new sanctions against Iran, and rising geopolitical risks, the only major sources of short-term supply growth to address global production decline and strong worldwide demand are Saudi Arabia, Kuwait, the UAE, Russia, and the US shale oil industry. However, production challenges in US shale are emerging that are linked to infill drilling well-to-well interference, the potential lower production of step-out drilling from Tier 1 acreage, and significant infrastructure constraints. It is, therefore, becoming increasingly likely that the industry will face growing supply challenges over the coming year and a significant increase in global E&P investment will be required to minimize the impending deficit.

Most estimates of 2018 crude oil production growth are looking to the United States to take the lion’s share. Kibsgaard’s caution on the challenges that producers face is timely and realistic and, therefore, not what investors want to hear.

Schlumberger said it expects to spend approximately $2 billion on capital investment, similar to its level in each of the past two years. The company did not offer further guidance in its press release, but consensus estimates call for second-quarter EPS of $0.48 and revenues of $8.29 billion. For the full year, EPS is forecast at $2.15 on revenues of $34.07 billion.

Shares traded down about 0.4% in Friday’s premarket to $70.00. The stock’s 52-week range is $61.02 to $80.35. The 12-month consensus price target was $81.17 before results were announced.

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