Leveraging Digital Innovation and Calculated Energy Investments for Robust Revenue and Margin Growth

What are the underlying business or industry changes driving this perspective?

• The international and offshore markets' focus on enhanced production and capacity additions, supported by investments in digital technologies, suggests an opportunity for increased revenue growth and potential for margin expansion due to efficiency gains and high-value services.
• Schlumberger's achievement of cycle-high margins and strong cash flows, particularly from the international and offshore segments, indicates operational efficiency and effective capital management, which could drive net margins and earnings growth.
• The integration of the Aker subsea business and the growth from digital revenue, with a compounded annual growth rate (CAGR) of 60% since 2021 in new technology platforms, indicates an avenue for diversified revenue streams and margin improvement through higher-margin services.
• A strategic focus on new energy investments, like carbon capture and storage (CCS) and partnerships in geothermal and geo-energy, points to long-term revenue growth opportunities in emerging sectors with potential for high margins due to their specialized nature.
• The announcement of a 10% increase in quarterly dividends and an enhanced share repurchase program for 2024, aiming to return more than $2.5 billion to shareholders, reflects confidence in sustained cash flow generation and earnings growth, underpinning the investment appeal of Schlumberger's stock.

How have these above catalysts been quantified?

• Analysts are assuming Schlumberger's revenue will grow by 10.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.7% today to 15.1% in 3 years time.
• Analysts expect earnings to reach $6.7 billion (and earnings per share of $4.61) by about April 2027, up from $4.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.5x on those 2027 earnings, down from 18.4x today. This future PE is greater than the current PE for the US Energy Services industry at 16.4x.
• Analysts expect the number of shares outstanding to grow by 0.73% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.91%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

• Prolonged geopolitical tensions in several regions could unexpectedly impact operational areas and lead to revenue losses or increased operational costs, potentially affecting margins.
• Short-term commodity price fluctuations, despite their decoupling from long-cycle investments, could introduce unpredictability in revenue streams and impact earnings if they affect client spending patterns.
• The heavy reliance on international and offshore markets, while beneficial so far, poses a concentration risk; any downturn in these markets could significantly impact revenue and net margins.
• The increasing integration and investment in digital technologies, while promising, carry execution risk. Failure to achieve anticipated efficiencies or market penetration could affect expected revenue growth and margins.
• Projected capital discipline in North America, despite fostering technology adoption, may limit revenue growth opportunities in this region, potentially affecting overall earnings if other markets do not compensate.

• The analysts have a consensus price target of $67.91 for Schlumberger based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with this, you'd need to believe that by 2027, revenues will be $44.6 billion, earnings will come to $6.7 billion, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $54.04, the analyst's price target of $67.91 is 20.4% 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.