It is no secret that the reflation in oil prices, WTI and Brent, above $50.00/bbl in the last six months has been a boon to the companies that service oil and gas wells. This price reflation in the underlying commodities has driven increases in upstream activity as shown in the graphic below.
Data- PrimaryVision, chart by author
In this article, we will review the improved financial metrics of one of the biggest Oilfield Service companies (OFS), Schlumberger, (NYSE:SLB), and some things it is doing to develop new technologies for the future. There is a fine line that companies like SLB must walk. They must find ways to generate cash flow and profits with the present dominant form of energy, petroleum. At the same time, to stay relevant for the long term they must meet the new energy economy with solutions.
Schlumberger exhibited a renewed sense of optimism about the year ahead in their most recent conference calls. This marked a pronounced change in tone from prior meetings with analysts and was backed up with reports of cash from operations that in many cases doubled from the prior quarter. They are also preparing to deliver new technology in the renewables space. Let’s take a closer look.
Schlumberger beat analyst’s forecasts on the top and bottom lines in Q-4 and gave strong guidance for Q-1. The company’s shares rallied from the low $20's in February to $30 in early March on this news. A general pullback in oil prices in mid-March knocked oil equities back in many cases about 20%. SLB has fallen consistent with that to the mid $20s, and that's going to be about it as WTI has found support around the $60 level. If you want to own SLB below $30 you are going to need to bite soon, as when the company releases earnings, I expect a move back above $30 and continuing higher through the year.
Stephane Biguet, SLB CFO commented on the improved market the company is seeing presently-
“The early signs of recovery in the international offshore markets, combined with the high-grading of our North America portfolio and the near completion of our restructuring efforts, will all support strong margin expansion in the future as the industry recovery unfolds. In particular, we can count on the strength of our international business, which despite a very challenging macro backdrop in 2020, generated EBITDA margins of close to 24% on a full-year basis. These margins are set to improve going forward.”
With that optimism noted regarding the resurgence of their core businesses, let’s look at a couple of the initiatives the company is pursuing in the area of renewable energy.
Schlumberger New Energies
SLB's New Energies division is developing renewable forms of energy on a number of fronts laying the groundwork for what the company may look like in a decade or so. One area is their “clean” hydrogen development through the Genvia venture with the French CEA. In the Genvia venture, they are deploying an interesting new technology called Solid Oxidizer Electrolyzer-SOE to achieve this aim.
Clean hydrogen has been the holy grail of renewable energy for a number of years. The problem is that most of the Earth’s supply of this element was bound up in liquid form and the energy required to separate it made the process uneconomic. Now, with various forms of electricity generation coming on-line (Wind/Solar), it is possible to pair these projects to produce free hydrogen economically. The press release for the Genvia joint venture makes the underlying business case for the development of this technology.
“In the next 30 years, hydrogen production could account for 20% of total energy demand, according to the Hydrogen Council. Genvia’s technology development and industrialization activities will be in step with the anticipated strong growth of the hydrogen economy. Genvia will provide innovative early solutions through strategic alliances in different industries.”
SLB has also started a new venture here in the U.S. state of Nevada. Called Neolith Energy, they will break ground soon on a pilot plant to extract lithium from the Nevada desert. The ultimate aim here is to demonstrate the commerciality of a new process for concentration of the lithium-ion and manufacturing lithium carbonate which is used primarily to make LI batteries. Just down the road in Sparks, Nevada is the world's largest consumer of lithium carbonate, the Tesla (NYSE:TSLA) Gigafactory. Coincidence? Probably not.
Some criticize the company for throwing scarce capital at blue-sky science projects like this. I applaud them. There is an energy transition underway to renewables, and if the company is to remain relevant and have a growth trajectory long term, it depends on some of these New Energies ventures panning out.
Q-4 2020 results
Revenues were $5,532 bn for the quarter. An improvement of 5% over the prior quarter, but down 33% from 2019. No great surprise there really. The key to me is the prior quarter improvement. EBITDA came in at $1,112 bn, up 9% from Q-3, but down 33% from 2019. I think the company has a line of sight to return to 2019 adjusted EBITDA of $6.6 bn by YE 2021, or early 2022. The company also made good on its commitment to return to ~20+% EBITDA margins in Q-4 and expects that to continue to improve through the year
SLB generated $878 mm of OCF and $554 mm of free cash flow during Q-4 up sequentially, but down from the ~$1.55 bn pace of 2019. The company's cash position improved to ~$3.0 bn in the quarter. The company has a $1.5 bn RCA against which there are no borrowings. SLB has ~$1.75 bn in debt coming due in 2022, ~$1.50 bn in 2023, and another ~$750 mm coming due in 2024. Through cash outlays, use of their RCA, or new debt offering to push back these amounts the company faces no insurmountable debt walls in the next few years. Debt increased about $600 mm in 2020 due to currency adjustments which are hedged and won't cause a detriment to cash.
I should also mention the company is the subject of a number of analyst upgrades recently with an average price target of $29, and an outlier estimate of $39.00. I think these will get another bump higher if the company delivers as I expect they will.
SLB is a company you want to own in the OFS space for growth and eventual income. They are the undisputed “King” of OFS companies with a legacy that goes back deep into the last century. The company’s core oil and gas business is set to perform at markedly higher levels than in the prior year, providing the cash flow necessary to reduce debt load, buy back shares, and ultimately increase their now minimal dividend. Over the short-haul, deleveraging the balance sheet is number one on their cash flow priorities list.
In addition to being well-positioned to reap the benefits from the oil and gas expansion cycle now underway, Schlumberger is a leader in using its core technical expertise to facilitate new forms of clean energy. This “strong footing” in the present, while looking down the road at the shape of the energy transition now in its early stages makes a compelling investment case for investors with a moderate risk profile.
With the cash the company will generate in the coming years, I feel an entry point at or near present levels will provide returns in the double-digit range for years to come.
By David Messler for Oilprice.com
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