CFRA has downgraded Schlumberger Limited (NYSE: NYSE:SLB) from Buy to Hold, adjusting the price target to $42 from the previous $59.
The revision reflects a lower expected multiple of enterprise value to projected EBITDA for 2025, taking into account anticipated macroeconomic challenges.
The firm's new 12-month target is based on a 7.5x multiple of the company's expected enterprise value to its forecasted earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2025.
This multiple is below Schlumberger's historical average, with the adjustment stemming from economic headwinds predicted to continue into 2025. CFRA has also revised its earnings per share (EPS) estimates for Schlumberger, reducing the 2024 EPS forecast by $0.08 to $3.43 and the 2025 EPS prediction by $0.27 to $3.91.
Industry consensus has set EBITDA margin expectations for 2025 in the 26% range, which would suggest a return to the profitability seen during the peak of the shale oil boom in 2011/2012.
However, CFRA anticipates that upstream capital expenditure (capex) will only increase by 3% to 4% in 2024 and 2025, a stark contrast to the double-digit growth rates experienced during the earlier shale oil expansion period.
According to CFRA, oilfield service companies like Schlumberger are likely to encounter challenges from their upstream customers, who are expected to allocate a significant portion of their operating cash flows to shareholder returns through buybacks and dividends, rather than reinvesting in development.
Additionally, the firm predicts modest economic growth in China, which could further dampen development spending.
While some margin improvement is expected compared to 2023, CFRA suggests that the extent of this improvement may fall short of investor expectations due to the factors mentioned.
SLB has made significant strides in both its financial performance and sustainable technology development. The company reported promising second-quarter earnings for 2024, with an adjusted earnings per share (EPS) of $0.85 and an adjusted EBITDA margin of 25%, exceeding expectations.
The robust performance was further bolstered by a 5% quarter-over-quarter revenue growth across all regions, reflecting SLB's strong international market presence. Analyst firms UBS, TD Cowen, RBC Capital, and Citi have maintained their buy ratings for the company, expressing confidence in its financial performance and strategic direction.
SLB also announced the successful operation of its sustainable lithium production technology at a demonstration plant in Nevada, achieving a 96% recovery rate of lithium from brine. This efficient process, which minimizes environmental impact, positions SLB as a significant player in the renewable energy sector.
The company's commitment to sustainable energy solutions was further underscored by securing a contract from Petrobras for Santos Basin development, and partnering with Aker Carbon Capture and CO280 Solutions Inc. for a large-scale carbon capture project at a pulp and paper mill on the U.S. Gulf Coast.
However, SLB's proposed acquisition of ChampionX, valued at $7.75 billion, has been delayed due to a request for additional information from the U.S. Department of Justice.
InvestingPro Insights
Recent data from InvestingPro highlights several key metrics for Schlumberger Limited (NYSE:SLB) that may offer additional context to CFRA's analysis. With a market capitalization of $55.74 billion and a P/E ratio of 12.75, the company presents a valuation that is reflective of its earnings. The adjusted P/E ratio for the last twelve months as of Q2 2024 shows a slight decrease to 12.24, suggesting a stable earnings outlook. Moreover, Schlumberger's revenue growth over the same period was 12.68%, indicating a robust increase in sales.
An InvestingPro Tip notes that Schlumberger's stock is currently trading near its 52-week low, which could be a point of interest for value investors. Additionally, the company has maintained dividend payments for an impressive 54 consecutive years, with a current dividend yield of 2.72%, highlighting its commitment to shareholder returns.
For readers interested in a more comprehensive analysis, InvestingPro offers additional tips on Schlumberger, including insights into earnings revisions, stock volatility, and profitability forecasts. In total, there are 10 additional InvestingPro Tips available for Schlumberger, providing a deeper dive into the company's financial health and market position. To explore these insights further, visit https://www.investing.com/pro/SLB.
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