Digital Offshore And Low Carbon Initiatives Will Shape Global Markets

Key Takeaways

• The acquisition of ChampionX and focus on digital markets are expected to boost revenue and strengthen earnings.
  
• Expansion into low carbon and data center markets aims to diversify and enhance long-term growth and margins.
  
• Economic and geopolitical challenges, including reduced drilling activity and cost overruns, could pressure revenues and margins, especially impacting international and Subsea division performance.

Catalysts

Engages in the provision of technology for the energy industry worldwide.

• The proposed acquisition of ChampionX is expected to enhance SLB's resilience and improve its mix, providing additional exposure to digital and offshore markets globally, potentially increasing revenue and strengthening earnings.
  
• Growth in Digital & Integration is driven by a 17% year-on-year increase due to customers accelerating adoption of digital and AI solutions, expected to decouple from upstream spending and represent a unique growth opportunity, likely improving revenue and net margins.
  
• The expansion in low carbon markets, driven by Capturi acquisition and growth in Data Center Infrastructure Solutions, is on pace to exceed $1 billion in revenue by 2025, contributing to diversified revenue streams and long-term growth.
  
• SLB's data center business is experiencing significant contract growth, driven by AI demand, expected to contribute to diversified exposure beyond oil and gas, potentially enhancing revenue and operating margins.
  
• Commitment to strategic cost optimization and process enhancements supports the mission to protect margins and generate strong cash flows, crucial for maintaining net margins and providing resilient returns to shareholders.

Schlumberger Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Schlumberger's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 14.1% in 3 years time.
• Analysts expect earnings to reach $5.4 billion (and earnings per share of $3.93) by about May 2028, up from $4.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $6.0 billion in earnings, and the most bearish expecting $4.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, up from 10.9x today. This future PE is greater than the current PE for the US Energy Services industry at 10.6x.
• Analysts expect the number of shares outstanding to decline by 4.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

Schlumberger Future Earnings Per Share Growth

Risks

• Economic uncertainties, including the acceleration of supply releases by OPEC+ and recent tariff announcements, could cause constraints in upstream investments and result in lower revenues.
  
• Revenue in international markets has been negatively impacted by reduced drilling activity in key countries such as Mexico, Saudi Arabia, and Russia, leading to an overall 3% year-on-year revenue decline despite positive results in North America.
  
• Operational cost overruns and challenges on several new projects have significantly impacted margins in the Subsea division, which could affect overall profitability if these issues continue.
  
• Global upstream investment is expected to decline compared to 2024, which could result in reduced customer spending and impact revenues, particularly in terms of discretionary spending.
  
• The evolving landscape of tariffs introduces uncertainty, potentially affecting imports and exports, particularly between the U.S. and China. This creates a risk of impacting production costs, operating margins, and overall earnings.

Valuation

• The analysts have a consensus price target of $47.805 for Schlumberger based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $63.0, and the most bearish reporting a price target of just $38.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $38.0 billion, earnings will come to $5.4 billion, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 7.4%.
• Given the current share price of $33.58, the analyst price target of $47.8 is 29.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.