SLB to Benefit from Acquisitions and International Operations (NYSE:SLB)

The share price of the giant international oilfield services company SLB (New York Stock Exchange: SLP) (formerly Schlumberger) represents an entry point for growth-oriented energy investors.

SLB has just announced the acquisition of specialist oilfield services company ChampionX. The acquisition is expected to close at a later date 2024.

Although only 20% of SLB’s revenue comes from North America – and its operations have been under as much pressure as all other companies in the North American oilfield services sector – the company derives 80% of its revenue from international operations. As the US shale market matures, companies able to do so are once again increasingly looking for oil abroad and internationally.

SLB’s market capitalization is down -24% from my last valuation eight months ago.

The company expects to return significant capital to investors through dividends and stock buybacks – $7 billion in the next two years. However it is It is not recommended for dividend seekers due to its modest 2.4% dividend and the availability of higher yields elsewhere.

But given the roughly 50% upside to his one-year target and the current low-priced entry point, I’d recommend SLB stock to energy investors interested in raising capital from international oilfield services growth. I own SLB shares.

Acquisition of ChampionX

In April 2024, SLB announced that it had acquired ChampionX in an all-stock deal valued at $7.75 billion. ChampionX manufactures production chemicals and provides artificial lift processes.

ChampionX shareholders will receive 0.735 shares of SLB for each share of ChampionX. (ChampionX shareholders will therefore own about 9% of SLB.) Once approved and integrated, SLB expects annual pre-tax synergies (savings) to reach $400 million within three years.

According to SLB, “The transaction is subject to ChampionX shareholder approval, regulatory approvals and other customary closing conditions. The transaction is expected to close before the end of 2024.”

Although anything is possible Because ChampionX is much smaller than SLB, SLB may not be subject to the same lengthy regulatory reviews as companies like Exxon Mobil (XOM), Chevron (CVX), Diamondback Energy (FANG), Chesapeake (CHK), and others. Acquisitions of large companies are much closer to their size.

precise

With the announcement of mergers and acquisitions in the US oil sector amounting to more than one hundred billion dollars, the sector’s trend is towards consolidation rather than organic growth (drilling). Moreover, as part of the integration efficiencies they seek, producers have been drilling less, putting pressure (once again) on the oilfield services sector.

However, since firms produce both internal and external reserves, to stay in business, they seek to at least replace this production.

Moreover, despite the high appreciation of the size of onshore unconventional reserves in the United States, especially in the western Permian Basin in Texas, larger US and international companies have renewed their search for reserves abroad, especially offshore.

One of the macro factors affecting all companies is the upcoming decision that the US Federal Reserve will make on interest rates at its meeting in June. At present, the general belief is that the Fed will hold off on interest rate cuts until the end of 2024.

The anti-hydrocarbon Biden administration has found many ways to limit the production and consumption of hydrocarbons in the United States through regulatory actions. For SLB, this is extremely beneficial in the very low number of offshore charter auctions in the Gulf of Mexico.

Many local and state entities, such as the City of Honolulu, are trying to sue oil and gas companies over climate change. It remains to be seen how, or if, the Supreme Court will handle this latest legal battle.

However, the momentum in energy policy has shifted from the energy transition (to non-hydrocarbon renewables) to the importance of energy security, affordability, and flexibility, all of which favor existing hydrocarbons and nuclear power.

Oil and gas prices

The Nymex Brent crude futures price on June 10, 2024 (for delivery in August 2024) was $81.96 per barrel. On June 10, 2024 for delivery in July:

*The price of West Texas Intermediate (WTI) crude oil reached $77.74 per barrel

*The Dutch Royal Transfer Facility (TTF) LNG price was US$10.80 per mmBtu.

In early May 2024, the EIA’s 95-5 confidence interval for future oil prices was between $40 and $130 per barrel by the end of 2025.

First quarter 2024 results

In the first quarter of 2024, SLB Bank obtained:

* $8.71 billion in revenue

* $1.07 billion in net income ($0.74 per share)

*Adjusted EBITDA of $2.06 billion, a margin of 23.6%

*Sector operating income before tax deduction of $1.65 billion, with a margin of 18.9%.

More than 80% of SLB’s revenue was international. Less than 20% came from North America.

SLB is organized through four operating divisions and four geographic regions. The operating divisions are 1) Digital and Integration, 2) Reservoir Performance, 3) Well Construction, and 4) Production Systems. The company’s first-quarter operating income before taxes by division, with margin, is shown below.

The importance of operations in Europe/Africa and the Middle East/Asia is evident in the graph of Q1 2024 revenues by region.

Discussing the growth, in the first quarter 2024 earnings statement, CEO Olivier Le Peuch said:

We’re off to an exciting start to the year with our announced agreement to acquire ChampionX Corporation (ChampionX), which will strengthen our production and recovery portfolio…

Compared to the same quarter last year, revenue increased 13%, earnings per share (excluding charges and credits) increased 19% to $0.75, adjusted EBITDA grew 15%, and EBITDA margin expanded On an annual basis for the thirteenth consecutive quarter. Nearly half of the year-over-year revenue increase came from the Aker subsea business, which was added as part of our OneSubsea joint venture in Q4 2023.

International revenues grew 18% year over year, offsetting weakness in the North American market where revenues declined 6%. Excluding the contribution from Aker’s subsea business, international revenues increased by 10%.

During the quarter, we continued to benefit from positive exposure to global markets, achieving significant year-on-year growth of 29% in the Middle East and Asia, in addition to 18% growth in Europe and Africa.

Through dividends and buybacks, SLB plans to return $3 billion to shareholders in 2024 and $4 billion in 2025. (If it continues at the current level, annual dividends would be $1.57 billion per year.)

Competitors

SLB is headquartered in Houston, Texas.

SLB’s biggest oilfield services competitors are Baker Hughes (BKR), Halliburton (HAL), and NOV Inc. (NOV). As a leading provider of oilfield services to national oil companies, it also competes with oilfield services companies in the Middle East and North Africa such as National Energy Services Reunited (OTCPK:NESR).

Smaller competitors for offshore oilfield services are Weatherford (WFRD), Transocean (RIG), and Tidewater (TDW).

Judgment

Institutional Shareholder Services (ISS) rated SLB’s overall governance as of June 1, 2024, as Outstanding 1, with subscale scores for Audit (6), Board of Directors (2), Shareholder Equity (4), and Compensation (1). On the ISS scale, 1 represents lower governance risk and 10 represents higher governance risk.

Short shares were 2.0% of shares outstanding on May 15, 2024, and insiders own a small portion (0.19%) of shares outstanding.

At 1.58, the company’s beta is considered very high given its large size: its stock moves directionally with the overall market but with much greater volatility. However, this reflects significant supply and demand uncertainties in the global oil services sector, even for a large company like SLB.

As of March 31, 2024, most SLB shares were held by institutions, in some cases representing index fund investments that are consistent with the overall market. The top five institutional holders were Vanguard (9.4%), BlackRock (7.8%), Capital World (6.2%), State Street and T. Rowe Price, both with a 6.0% stake.

All of them, except Vanguard, are signatories to the Net Zero Asset Managers Initiative, the group that does the management $57 trillion in assets around the world and which limits investment in hydrocarbons through its commitment to achieve net zero by 2050 Or soon.

Highlights of financial events and stocks

At the June 10, 2024 closing price of $44.98 per share, SLB has a market capitalization of $64.3 billion.

The 52-week price range is $42.77 – $62.12 per share, so the closing price is at the lower end of the range, hitting 72% of the 52-week high and 68% of the 1-year average target of $66.41 per share. .

Trailing twelve-month earnings per share (EPS) are $3.00 for a current price/earnings ratio of 15. Average analyst estimates for 2024 and 2025 EPS are $3.52 and $4.16 respectively, giving a price/earnings ratio range Futures 10.8 -12.8

EBITDA, operating cash flow, and free cash flow were, respectively, $7.5 billion, $6.6 billion, and $3.0 billion.

The return on assets and equity reached 7.8% and 22.0%, respectively.

At March 31, 2024, SLB had liabilities of $25.9 billion, of which $10.7 billion was long-term debt, and $47.9 billion of assets, giving it an improved liability-to-asset ratio of 54%, down from 58% in the past. a report.

The company’s debt-to-EBITDA ratio is 1.6, and its market cap is 0.19.

SLB’s dividend of $1.10 per share is 2.4%.

SLB has a stock repurchase program and repurchased $270 million (5.4 million shares) during the first quarter of 2024. The company said in its first quarter 2024 report that it expects to return $3 billion to shareholders in 2024 and $4 billion in 2025 in the form of Dividends and buybacks.

The book value per share is $14.51, about a third of the stock’s current market value.

The Enterprise Value to EBITDA ratio is 9.6, just below the maximum of 10.0 or less, indicating a bargain.

The average analyst rating is 2.1, or “buy,” from 37 analysts.

Positive and negative risks

SLB’s two main exposures in the medium term are changes in oil and natural gas prices and therefore changes in drilling budgets around the world, and efficiency efforts following several large-scale mergers, which have led and could lead to reduced drilling and other activities.

As an international operator, SLB faces political risks in every country in which it operates, including the United States.

SLB’s dividend yield alone, barring stock buybacks or stock price appreciation, does not compete with two-year Treasury bond prices.

Recommendations for SLB

Although SLB has a stock buyback program as well as a modest 2.4% dividend, it is not recommended for investors. Dividends from other companies, interest rates on debt securities, and even the interest rate on the less risky two-year U.S. Treasury note, pay investors more than SLB’s dividends.

Despite the current shift in spending on oilfield services with oil and gas companies undergoing consolidation, SLB’s growth prospects are good, especially as larger companies turn their sights towards long-term growth towards international horizons, which is SLB’s strength.

The company has excellent governance scores, and the stock is at the lower end of its 52-week range. Positive (value) metrics include an enterprise value to EBITDA ratio of 9.6, and a forward price-to-earnings ratio of 10.8-12.8. The upside of the one-year price target for SLB is approximately 50%.

Given the outward and international mobility, the company’s upside potential, and relative transaction price, I would recommend SLB to growth investors interested in globally diversified and broad-based oilfield services. I own SLB shares.

Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these stocks.