Schlumberger Beats And Raises On Improving Fundamentals

If results from Baker Hughes (NYSE: BKR) and Haliburton (NYSE: HAL) weren’t enough to convince you of a rebound in the oil services sector Schlumberger (NYSE: SLB) has given us some more evidence. The company reported a solid quarter driven by strength in all regions and segments due to increased investment in the oil industry. Based on our read of the chatter, the oil industry is in the early phases of a multi-year investment cycle intended to bolster current capacity and output. Regardless, it’s good news for the likes of Schlumberger, and the results are seen in both the top and bottom line results as well as in the guidance. 

"Growth was broad-based," CEO Olivier Le Peuch said, "characterized by a favorable mix of exploration and offshore activity and the increasing impact of improved pricing, resulting in the largest sequential quarterly growth since 2010."

Schlumberger Hits A Gusher In Q2 2022

Schlumberger had a stellar Q2 supported by improved pricing as well as demand. The company reported $6.77 billion in net revenue for a gain of 20.2% over last year. The revenue also beat the consensus by $0.490 billion or 780 basis points on strength in both North America and International sales. No mention was made of FX headwinds or their impact on sales or earnings. On a product basis, Well Construction led with a 27% gain, followed by a 19% increase in Reservoir Performance, a 17% increase in Digital services, and a 13% increase in Production Systems. 

“The second quarter marked a significant inflection point for Schlumberger with a strong acceleration of revenue and earnings growth … The quarter was also characterized by a favorable mix of exploration and offshore activity and the increasing impact of improved pricing, resulting in the largest sequential quarterly growth since 2010,” says Schlumberger CEO Olivier Le Peuch. 

Moving on to the earnings, the company reported a 212 basis point increase in the operating margin that helped amplify the top-line strength. The margin led to a 30% increase in operating income that left the GAAP earnings at $0.67 or up $0.31 from last year. Adjusting for one-off items and comparability, the adjusted EPS of $0.50 is up from last year’s $0.30 and beat the consensus by a dime. 

Schlumberger, A Blend Of Value And Yield 

Schlumberger isn’t the highest valued oil services stock nor the lowest, and that is also true of the dividend yield. The stock is trading about 17X its earnings and pays about 1.6% in yield compared to 24X earnings and 3% in yield for Baker Hughes and 14X and 1.2% for Haliburton. In our view, the yield is not only safe at this level but on track for a big increase due to the strength of earnings and the outlook. The company cut its payout by nearly 75% in the wake of the pandemic and has only recently begun to bring it back up to those levels. At current levels, Schlumberger could increase the payout by 100% and still have plenty of ammunition for future increases. 

The Technical Outlook: Schlumberger Is In Reversal 

The price action in Schlumberger hit a bottom a few weeks before the Q2 report was released and is now confirming a reversal at that level. The price action formed a Head & Shoulders reversal pattern with $34.85 as the baseline, and that baseline has been broken. The indicators are consistent with a move higher as well, so we think this move has legs. The next target for resistance is the short-term moving average, a break above that would be very bullish.