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The oil-services company Schlumberger is eliminating 21,000 jobs after a disastrous quarter. Analysts are optimistic.
Schlumberger
(ticker: SLB)’s second-quarter results, posted Friday morning, were grim at first glance—a 35% year-over-year decline in revenue and a plan to cut a quarter of the staff. But analysts now seem convinced that the worst is behind the company, focusing on a positive surprise in the bottom line and management’s strategy to quickly adjust to the post-Covid era.
Schlumberger, the world’s largest oil-services company, recorded total revenue of $5.36 billion in the second quarter, down by 28% from the previous quarter and by 35% from the same period in 2019. The company also said it will eliminate the jobs of more than 21,000 staff—24.7% of the roughly 85,000 employees it had in more than 120 countries as of June.
“This has probably been the most challenging quarter in past decades,” chief executive Olivier Le Peuch said in a Friday statement. Le Peuch attributed the drop in revenue to “historic oil demand and supply imbalances caused by demand destruction from the global COVID-19 containment effort.”
Sales in North America fell 58% year on year. International sales, which account for roughly three-fourth of Schlumberger’s total revenue, fell 24%.
Schlumberger did beat investors’ expectations for the bottom line. Excluding $3.7 billion of impairment charges, the company had non-GAAP net income of $69 million. Based on the adjusted figure, per-share earnings ended up at 5 cents, beating the loss of a penny a share a FactSet poll indicated analysts expected.
Schlumberger management said the company would continue to tighten its belt. “We are permanently removing $1.5 billion of structural costs annually by reorganizing Schlumberger into a leaner and more responsive company,” Le Peuch told investors.
According to Chief Financial Officer Stephane Biguet, Schlumberger had achieved about 40% of the streamlining by June and aims to complete most of the rest, which largely is related to international operations, by the end of 2020.
Schlumberger had already started restructuring in North America last year and accelerated the move during the pandemic. So far, the company has shut down about 150 operations facilities, focusing on cutting fixed and infrastructure expenses, Le Peuch said. By June, 18,000 employees had left the company, a Schlumberger spokesperson told Barron’s.
In the near term, “oil demand is slowly starting to normalize and is expected to improve as government measures support consumption” said Le Peuch. “However, any further material COVID-19 disruption or significant setback in oil demand arising from a slower economic recovery could present downside risks to this outlook.”
Analysts cheered the better-than-expected earnings and cost reductions.
The result “has positive implications for the stock,” said James West at Evercore ISI in a Friday note. West focused on Schlumberger’s three strengths: the ability to generate free cash flow, which ended up at $465 million in the second quarter; its relative resilience in international operations; and its rapid digital transformation, evidenced by a flurry of contracts including a joint digital-drilling development with
Exxon Mobil
(XOM).
“The company is quickly becoming more asset light, free cash flow generative as a percentage of revenue, and a key leader in the industry’s digital transition,” West said. He reiterated an Outperform rating with a target of $28 for the stock price.
Cowen analyst Marc Bianchi, too, cited the strong earnings as positive, keeping the stock at Outperform, with a $27 price target. For the third quarter, “revenue is expected to be flat and margins aided by cost savings, mix, and technology,” but as no specifics were given regarding how much margins might rise, “we’re flying a bit blind,” Bianchi said in a Friday note.
Stephens analyst Tommy Moll is still a bit cautious about Schlumberger’s potential. “While we applaud SLB’s new leadership team for rapidly streamlining/focusing the organization on its strengths,” Moll said, the stock deserves only an Equal-Weight rating until the company’s earnings power under the “new normal” after the second half of 2020 becomes clearer.
Schlumberger stock rose 0.9% to $19.48 on Friday, while the S&P 500 fell 0.6%. Schlumberger is down 51.5% year to date, while the S&P 500 is down 0.5%, though the stock has far outperformed the index over the past three months.
Schlumberger’s rival
Halliburton
(HAL) announced restructuring plans when it reported its earnings on Monday, saying it will eliminate thousands of jobs and cut its dividend.
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