Schlumberger (NYSE:SLB)is scheduled to report their Q2 earnings on July 21, before the market opens. Since May, the stock has gained significant momentum, rising more than 30%. In this article, we will explore the reasons behind this surge and discuss what we can expect from Schlumberger’s earnings.
While technology stocks have been performing exceptionally well in 2021, the energy sector has faced some challenges. It has been the worst-performing sector in the past three months, along with utilities having a poorer performance in the past six months. However, this underperformance presents opportunities for value investors. The energy sector, unlike tech stocks, has priced in a potential recession, leading to a significant shift in the risk/reward dynamic. The energy sector’s valuation compared to the S&P 500 is at a significant discount, making it an attractive investment option.
One major reason for the attractiveness of the energy sector is the plateauing of production growth in major basins. The growth engine of global supply growth, which is US shale, is running out of steam. Most major basins, including Eagle Ford and Bakken, have already peaked. Even the Permian Basin, considered a growth engine, is now showing signs of reaching peak production. This situation, coupled with the expectation that global oil demand will continue to grow, may lead to a new era of potentially higher oil prices.
Furthermore, despite economic growth deterioration, Brent crude oil is still trading close to $80. A rebound in mid-term demand growth is likely to boost commodities and support inflation, which could result in a rotation from growth to value stocks. Money managers’ positioning shows that the value/commodity trade may be the least crowded at the moment.
Although Schlumberger doesn’t produce oil, it plays a crucial role in providing oil and gas exploration and production services. The company generates its revenue through various segments, with Well Construction being the largest. Service sector companies like Schlumberger are typically late to the party, as drilling activity lags behind oil prices. However, with the current low levels of drilled but uncompleted wells (DUCs), service companies will be in demand as energy prices pick up.
When comparing Schlumberger’s shares to oil drillers, we see that they are outperforming. This ratio has reached a multi-year high in 2023, indicating that higher oil prices will likely lead to increased capital expenditure (CapEx) in the industry. During the first quarter earnings call, Schlumberger’s CEO highlighted a positive outlook for the company, emphasizing growth opportunities in Well Construction, Reservoir Performance, and Production Systems.
Wall Street expects strong earnings performance from Schlumberger in Q2, with a projected EPS of $0.71 and a 21% year-on-year revenue growth. The company has a track record of beating earnings estimates. The current consensus price target is $65, but considering the potential for higher oil prices, some experts believe that the stock could reach the $80 to $90 range within the next 24 months.
As investors anticipate Schlumberger’s earnings report, the energy sector presents an attractive opportunity for value investors. With the plateauing of production growth in major basins and the potential for higher oil prices, Schlumberger, as the largest provider of oil and gas exploration and production services, stands to benefit. Strong projected revenue growth and margin expansion support the company’s positive outlook. Wall Street expects strong earnings performance, and bullish comments and guidance during the earnings call could drive the stock price above $60. If the oil thesis holds true, there is potential for SLB stock to reach the $80 to $90 range within the next 24 months.
