Last week, SLB (SLB – Free Report) reported strong third-quarter 2024 results, driven by earnings growth from the Production Systems and Digital & Integration business segments. Despite the positive, the oilfield service giant’s overall business outlook is not impressive.
Before delving into the underlying reasons for the subdued outlook and addressing how investors should strategically position themselves regarding the stock, let’s first review the third-quarter results.
SLB’s Q3 Earnings Snapshot
On Oct. 18, SLB reported third-quarter 2024 earnings of 89 cents per share (excluding charges and credits), which beat the Zacks Consensus Estimate of 88 cents. The bottom line increased from the year-ago quarter’s level of 78 cents.
The oilfield service giant recorded quarterly revenues of $9.16 billion, which missed the Zacks Consensus Estimate of $9.28 billion. The top line, however, improved from the year-ago quarter’s figure of $8.31 billion. For a detailed analysis, read our blog on third-quarter earnings: SLB Q3 Earnings Beat Estimates, Revenues Rise Year Over Year.
Halliburton Company (HAL – Free Report) and Baker Hughes (BKR – Free Report) two other leading players in the oilfield services sector, are yet to report third-quarter earnings.
SLB Faces Alarm Over Cautious Global Spending, U.S. Weakness
Baker Hughes reported an international rig count of 937 for the September quarter, a notable decline from 963 rigs in the previous quarter and 965 rigs in the first quarter of 2024. This reduction indicates a broader trend where exploration and production companies are probably implementing cuts in their capital expenditure budgets for drilling activities. This shift is primarily due to increased pressure from shareholders, who are advocating for capital returns over further investments in exploration and production.
Image Source: Baker Hughes Company
Lower drilling activities could diminish demand for services from major oilfield service provider SLB in the international market, which contributes mostly to SLB’s revenues.
Also, the U.S. land market continues to be restricted by low gas prices and operators’ capital discipline, limiting growth. This weak outlook for North American spending is projected to persist into 2025, with no substantial recovery expected in the near term.
Macroeconomic Woes and Overvaluation Spark Concerns for SLB
An oversupplied market, softer demand from key regions like China, and sluggish economic growth rates in Europe and the United States are putting continuous pressure on SLB. These macroeconomic challenges have dampened short-cycle investments, hindering the company’s revenue growth.
All these risk factors are reflected in SLB’s price performance. Year to date, the stock has lost 22.2% compared with the industry’s decline of 7%.
Image Source: Zacks Investment Research
Despite the year-to-date price decline, SLB still appears relatively overvalued, indicating the potential for further price decreases. The company’s current trailing 12-month enterprise value/earnings before interest, tax, depreciation and amortization (EV/EBITDA) ratio is 7.75, which is trading at a premium compared to the broader industry average of 6.77.
Image Source: Zacks Investment Research
Time to Get Rid of SLB Stock
With clients adopting a more cautious approach to discretionary spending, especially in short-cycle projects, due to macroeconomic challenges like commodity price fluctuations and budget constraints, selling this stock would be a prudent move. The stock currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
