Oilfield giant Schlumberger Limited (SLB) in Paris, France, supplies reservoir characterization, drilling, production, and processing technology to the oil and gas industry worldwide. It operates in four divisions: Digital & Integration, Reservoir Performance, Well Construction, and Production Systems. SLB’s shares have rallied 40.8% in price over the past year and 13.9% over the past month to close yesterday’s trading session at $35.12. The favorable oil and gas market environment boosted the company’s returns. The stock has been up 17% in price over the past five days, outpacing the broader S&P 500’s 2.6% retreat over the period.

Also, because OPEC+ sticking to its plan to ease its supply cuts through July, upstream companies should boost capital spending, thus adding to oil field service firms’ top-line growth. Oil benchmarks rose on OPEC+’s signal of confidence in oil demand through the omicron wave, topping the $80-mark last week.

However, the rise in omicron cases worldwide, has compelled several countries to re-impose restrictions, hindering oil demand. The omicron wave is adding new uncertainties to the global oil market, which could create a bearish environment for oil prices. SLB  recently disclosed adjusting its operations planning because COVID-19 infections have surged among its U.S. workforce.

Here is what could shape SLB’s performance in the near term:

Stretched Valuation

In terms of forward P/E, SLB is currently trading at 27.09x, which is 92.2% higher than the 14.10x industry average. Also, its 12.62 forward EV/EBITDA ratio is 56% higher than the 8.09 industry average. Also, SLB’s 2.16x and 12.06x respective forward Price/Sales and Price/Cash Flow are 43.3% and 105.3% higher than the industry averages.

Mixed Financials

The company’s revenues have declined at a 12.2% CAGR over the past three years and 4.8% over the past five years. Its EBIT and EBITDA also decreased at CAGRs of 10.6% and 12.8%, respectively, over the past three years. Also, SLB’s levered FCF has declined at a 14.1% CAGR over the same period.

For its fiscal third quarter, ended Sept. 30, SLB’s revenues increased 11% year-over-year to $5.85 billion. Its adjusted EBITDA grew 27% from its year-ago value to $1.30 billion. In addition, the company’s non-GAAP net income increased 126% year-over-year to $514 million, while its EPS increased 125% year-over-year to $0.36.

Impressive Profitability

SLB’s 7.44% net income margin  is 254.1% higher than the 2.10% industry average. Also, its 10.94% EBIT margin is 35% higher than the 8.11% industry average.

Moreover, SLB’s 13.07%, 4.03%, and 5.14% respective ROE, ROA, and ROTC compare with the 2.85%, 1.04%, and 3.52% respective industry averages.

Consensus Rating and Price Target Indicate Potential Upside

Of the 7 Wall Street analysts that rated SLB, six rated it Buy, while one rated it Hold. The $42.42 median price target indicates a 20.8% potential upside. The price targets range from a low of $40.00 to a high of $48.00.

POWR Ratings Reflect Uncertain Prospects

SLB has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of C for Growth, consistent with its mixed financials.

SLB also has a C grade for Stability. Its 60-month beta of 1.37 justifies this grade.

Of the 41 stocks in the Energy – Services industry, SLB is ranked #11.

Beyond what I have stated above, you can also view SLB’s grades for Quality, Value, Momentum, and Sentiment here.

View the top-rated stocks in the Energy – Services industry here.

Bottom Line

SLB has rallied over the past year due to increased investor interest in the energy space. However, the company’s financial growth over the past few years has been sluggish. Moreover, with the omicron variant fostering uncertainties around the global oil outlook, the stock might be subject to a correction given its high volatility and stretched valuations. Although Wall Street analysts see a potential upside in the stock, I think it could be wise to wait for the market outlook to stabilize before investing in it.

How Does Schlumberger Limited (SLB) Stack Up Against its Peers?

While SLB has an overall POWR Rating of C, one  might want to consider taking a look at its industry peers, Rex American Resources Corp. (REX), which has an A (Strong Buy) rating, and Subsea 7 S.A. (SUBCY) and NOW Inc. (DNOW), which have a B(Buy) rating.

SLB shares rose $0.18 (+0.51%) in premarket trading Tuesday. Year-to-date, SLB has gained 17.26%, versus a -1.99% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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