It used to be so easy. There are any number of oil services companies out there trading publicly that could garner investor attention. There are only two, however, that are considered to be industry leaders. Schlumberger (SLB) and Halliburton (HAL) . If oil prices were headed higher, one needed exposure to oil services. If production was on the rise in North America, one wanted to be in Halliburton. If production was rising more quickly globally, then Schlumberger was the obvious choice.
Then suddenly, or maybe not so suddenly, changing climates made for a less friendly environment for fossil fuels. Demand for electric vehicles and pretty much everything else surged. Sure, there was still a present need in the real world for fossil fuels, but ESG investing became thematic, and even if traditional oil companies could provide cash flow and pay out a fat dividend, exposure was no longer coveted by portfolio managers. It became less easy, in fact it became quite difficult.
Turn the Page
The worm turned going into and coming out of the pandemic. Then, the worm turned again, as a large-scale kinetic war broke out in eastern Europe. The Energy sector SPDR ETF (XLE) is up 61% year to date, easily leading the 11 S&P sector designations. Staples (XLP) are currently in second place at -9%.
Coal, once scorned as bad for the environment, became precious. The Dow Jones US Coal Total Stock Market Index is up 82% in 2022. By comparison, the Dow Jones US Oil Equipment and Services Index is up 49%. SLB closed Friday up 70% ytd, while HAL closed out last week up 49% this year. Baker Hughes (BKR) , also in the oil services racket, has only run 13% for 2022.
Beats
Schlumberger reported the firm's third quarter on Friday morning. The firm posted GAAP EPS of $0.63, which was good for year over year earnings growth of 62%. That number was representative of a net income print of $907M (+65%). Revenue popped 28% y/y to $7.477B. Performance at both top and bottom lines exceeded Wall Street's expectations. International revenue gained 26% to $5.9B, while North American revenue increased 37% to $1.5B.
Schlumberger produced free cash flow of $1.1B during the third quarter, bringing year to date free cash flow up to $563M. The firm also guided fourth quarter sales toward growth in the mid-20% range, which is above the 19.3% consensus for that metric.
Segment Performance
Well Construction drove revenue of $3.084B (+36%), producing pre-tax operating income of $244M (+28%) for a pre-tax operating margin of 21.5% (+635 bps).
Production Systems drove revenue of $2.15B (+28%), producing pre-tax operating income of $224M (+36%) for a pre-tax operating margin of 10.4% (+55 bps).
Reservoir Performance drove revenue of $1.456B (+22%), producing pre-tax operating income of $244M (+28%) for a pre-tax operating margin of 16.7% (+77 bps).
Digital & Integration drove revenue of $900M (+11%), producing pre-tax operating income of $305M (+7%) for a pre-tax operating margin of 33.9% (-119 bps).
Balance Sheet
Schlumberger ended the quarter with a net cash position of $3.609B, inventories of $4.143B, and current assets of $15.611B. All three numbers are up since the start of the year. Current liabilities amount to $11.134B including $899M worth of shorter-term debt. This leaves the firm with a current ratio of 1.4, which is not only a solid number, it is also up from 1.22 nine months back. The firm's quick ratio comes to 1.03, also on the year, from 0.91. That's a huge improvement in balance sheet quality.
Total assets come to $44.093B, which includes $16.033B in "goodwill" and other intangibles. At 36% of total assets, I find this level a bit higher than I would prefer, however, this percentage is not out of line with modern norms. Total liabilities less equity add up to $26.582B. This includes long-term debt of $12.452B. I would personally like to see a better balance between cash on hand and the debt-load, but that's me being old-school. This is not a poor balance sheet by any means.
Rebranding
On Monday morning, Schlumberger announced a name change to simply "SLB", which as the stock symbol, keeps things neat and tidy. The firm states that it has laid the groundwork "for its increasing focus on low and zero carbon energy technology solutions while continuing to drive innovation, decarbonization and performance for the oil and gas industry."
My Thoughts
I have not had a great deal of exposure to oil services in some time. I am long Halliburton right now, but that's a new position since last Friday given what I saw with Schlumberger's earnings and especially the growth experienced by Schlumberger in North America. That's where Halliburton does a greater percentage of its business relative to SLB. It helps that SLB trades at 23 times forward looking earnings, while HAL trades at 17 times.
SLB has just completed a cup pattern with a $50 pivot. Should the cup add a handle the pivot would move from the left side of the cup to the right, and in this case, basically stand in the same spot. I think SLB is a good stock, operating well in an environment of increasing demand. A real risk will be global recession, which is real and likely to be worse than the recession experienced here in the US. Another reason to consider Halliburton for oil services exposure.
Readers will see that the stock HAL is on the same track as SLB, though at this point, not quite as far along in its development. HAL did retake its 200 day SMA last week. Halliburton reports on Tuesday morning. Wall Street is looking for GAAP EPS of $0.56 on revenue of $5.34B. This would be earnings growth of 100% on revenue growth of 38.3%. I am looking for at least a revenue beat. I am willing to swap out of HAL and into SLB after a potential HAL earnings related pop if I see SLB adding that already mentioned handle.
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