We Gave This Stock a 10/10

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Every barrel of oil pumped from the ground likely owes a debt to a company you might not know by name: SLB (Schlumberger).

This energy services titan has been the backbone of the oil and gas industry for nearly a century, providing the technology and expertise that keeps the world’s energy flowing.

Yet, as the global push for clean energy gains momentum, SLB faces a pivotal challenge.

The company is betting big on digital transformation, artificial intelligence, and even sustainable lithium production to secure its future in a rapidly evolving energy landscape.

Our TrackStar data shows a recent uptick in interest from financial professionals and retail investors, particularly following SLB’s strong Q3 2024 results and the announcement of its new Lumi AI platform.

But can a company so deeply rooted in fossil fuels successfully pivot to the digital age?

However, the stock’s performance has been relatively muted, up only modestly year-to-date despite the company’s robust financial metrics.

So, is SLB a hidden gem poised for a breakout, or is it fighting a losing battle against the tide of renewable energy?

Schlumberger’s Business

SLB’s technology touches nearly every drop of oil and cubic foot of gas produced globally.

As the world’s largest oilfield services company, SLB has been at the forefront of energy innovation since 1926, continually pushing the boundaries of what’s possible in oil and gas extraction.

Operating across more than 120 countries, SLB offers a comprehensive suite of services that span the entire lifecycle of oil and gas fields.

The company’s expertise touches every aspect of energy extraction and management, from cutting-edge seismic surveys to advanced production optimization techniques.

SLB segments its business into four key areas:

• Digital & Integration (12% of total revenues) – Delivers AI-driven platforms and digital solutions for the energy sector.
• Reservoir Performance (20% of total revenues) – Provides reservoir characterization and well testing services.
• Well Construction (36% of total revenues) – Offers drilling technologies and well construction services.
• Production Systems (34% of total revenues) – Supplies production systems and artificial lift technologies.

In the third quarter of 2024, SLB demonstrated strong financial performance with revenue reaching $9.16 billion, a 10% increase year-on-year. The company’s adjusted EBITDA margin expanded to an impressive 25.6%, marking its highest level since early 2016.

SLB is actively pursuing strategic initiatives to maintain its industry leadership. 

The launch of the Lumi data and AI platform represents a significant step forward in digital innovation, positioning SLB at the forefront of the energy sector’s digital transformation.

Diversification efforts have led SLB into new territories, including sustainable lithium production. Using proprietary technology, the company has achieved breakthrough results in lithium extraction, potentially opening up new revenue streams in the growing electric vehicle market.

In a move to optimize its portfolio, SLB recently announced the sale of its Palliser asset in Canada. This strategic divestment aims to reduce exposure to commodity price volatility and improve the company’s overall financial position, demonstrating SLB’s commitment to maintaining a strong and adaptable business model in a dynamic energy landscape.

Financials

Source: Stock Analysis

SLB’s Q3 2024 results showcase a company successfully navigating the transition from traditional oilfield services to a digital energy future. 

Revenue surged 12.4% year-over-year to $16.0 billion, outpacing the TTM figure of $33.9 billion and signaling accelerated growth.

At the heart of this growth is SLB’s Digital & Integration segment. While only 12% of revenues, it’s the fastest-growing division and a key driver of margin expansion. 

The recent launch of the Lumi AI platform underscores SLB’s commitment to leading the digital revolution in energy.

This digital push is paying off. 

Q3’s net income hit $4.5 billion, up 7.8% year-over-year, while free cash flow soared to $4.2 billion – more than double the TTM figure. 

Meanwhile, SLB’s traditional segments remain robust. Gross and operating margins held steady at 20.4% and 17.2% respectively, demonstrating SLB’s ability to maintain efficiency while pivoting towards new technologies.

Despite these strong financials, SLB’s stock performance has been muted. 

The company’s 2.6% dividend yield is modest. Yet, management stated they planed to return $4 billion to shareholders in 2024 and $5 billion in 2025, which yields 6.8% and 8.4% respectively.

Valuation

Source: Seeking Alpha

SLB’s valuation puts it at the cheaper end of the group, with a 13.5x P/E and 9.2x price to cash ratio compared to Baker Hughes’ (BKR) 18.5x and 12.6x or Tidewater’s (TDW) 20.6x and 15.1x respectively.

However, SLB isn’t as cheap as Haliburton (HAL) or Nov (NOV), both of which trade under 10x on both measures.

Growth

Source: Seeking Alpha

SLB’s premium over Haliburton and Nov comes thanks to its strong sales growth in recent years and its outlook.

Tidewater is the only company listed here that expects revenue growth above SLB’s 12.6% in 2024.

Interestingly, Tidewater matches SLB’s free-cash-flow growth average for the past three years at +40%, with only Haliburton delivering higher numbers.

Profitability

Source: Seeking Alpha

All the companies listed here run similar gross margins except Tidewater.

And SLB and Haliburton run similar EBIT, net income, and free cash flow margins.

Yet, Haliburton shows better returns on equity, assets, and total capital than SLB despite yielding a bit more than half of the cash from operations that SLB generates.

Our Opinion 10/10

We like SLB’s value here trading at just 12.5x forward earnings and 7.8x forward cash flows.

Management has also committed to keeping debt in check, paying back shareholders from its cash flows.

The stock hasn’t done well as oil prices fell and drilling has declined.

Yet, we expect the core business to pick up in 2025 alongside continued growth from digital services.

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