Decarbonization Trends Will Shrink Oilfield Demand And Margins

Key Takeaways

• The global shift to renewables and decarbonization targets threatens Schlumberger's oilfield service revenue and long-term growth.
  
• Rising costs from R&D, compliance, and digital transformation risk compressing margins and reducing earnings stability in a transitioning energy landscape.
  
• ChampionX acquisition, diversification into digital and new energy technologies, and robust oilfield activity position Schlumberger for stronger earnings growth and increased margin resilience.

Catalysts

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

• The accelerating shift by governments and major corporations towards ambitious decarbonization and net-zero targets is set to reduce global demand for oilfield services over the next decade, shrinking Schlumberger's (SLB's) addressable market and placing long-term pressure on revenue growth.
  
• Rapid advancements and continued cost declines in renewable energy sources such as solar, wind, and energy storage technologies are expected to erode oil and gas's share of the global energy mix, threatening Schlumberger's core service and equipment revenue base, and increasing the risk of long-term stagnation or decline.
  
• The company's recent sizeable acquisition of ChampionX reinforces SLB's exposure to traditional oil and gas markets; should the pace of global energy transition accelerate, Schlumberger may experience increased asset write-downs, impaired regional earnings, and declining margins as legacy segments become less profitable.
  
• Elevated capital requirements for ongoing R&D and digital transformation-necessary to address technological commoditization and decarbonization pressures-could significantly squeeze SLB's net margins and returns on capital, especially if revenue fails to keep pace with these rising costs.
  
• Intensifying ESG scrutiny and restrictions on fossil fuel financing are likely to result in higher regulatory compliance costs and more constrained access to capital markets for oilfield service providers, directly threatening Schlumberger's ability to reinvest in growth initiatives and ultimately impacting free cash flow and overall earnings stability.

Schlumberger Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Schlumberger compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Schlumberger's revenue will grow by 1.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.5% today to 12.8% in 3 years time.
• The bearish analysts expect earnings to reach $4.7 billion (and earnings per share of $3.32) by about July 2028, up from $4.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, down from 11.6x today. This future PE is lower than the current PE for the US Energy Services industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 4.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.47%, as per the Simply Wall St company report.

Schlumberger Future Earnings Per Share Growth

Risks

• The continued global focus on unlocking production potential of aging assets, combined with rising energy demand in the Middle East, Asia, and Africa, suggests resilient and growing oilfield activity that can support steady or growing revenues for Schlumberger in coming years.
  
• The completion of the ChampionX acquisition gives Schlumberger unmatched scale and diversification in production chemicals, artificial lift, and digital technologies, which enhances recurring revenue streams and bolsters net margins over the long term.
  
• Strong momentum in Schlumberger's high-margin digital business, with customer adoption of the DELFI platform and new AI/cloud offerings expanding rapidly, supports the potential for robust margin and earnings growth regardless of cyclical industry volatility.
  
• Substantial cost and supply chain synergies from the ChampionX acquisition-targeted at $400 million annually, with half expected in the first 18 months-promise to make the combination accretive to earnings per share and EBITDA margins by 2026.
  
• Schlumberger is diversifying into new energy technologies, such as carbon capture and storage, which positions the company for long-term revenue resilience and a smoother earnings trajectory as energy transition investments increase globally.

Valuation

• The assumed bearish price target for Schlumberger is $36.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Schlumberger's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 $36.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $37.1 billion, earnings will come to $4.7 billion, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $35.14, the bearish analyst price target of $36.0 is 2.4% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.