Strategic Growth And Digital Transformation Pave The Way For Enhanced Market Share And Earnings

Key Takeaways

• Expansion in international markets and adoption of digital technologies signal future revenue growth and market share expansion in high-margin segments.
  
• Strategic cost-efficiency measures and diversification into new energy sectors, coupled with strong shareholder returns, indicate a robust growth outlook.
  
• SLB faces risks from unconventional gas projects, market consolidation, digital transformation, and international exposure, impacting revenue, margins, and earnings.

Catalysts

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

• Continued international market growth momentum and record GeoUnit revenues signal stronger future earnings potential through expanded scale and market share.
  
• Increased adoption of digital technologies in operations points to revenue growth prospects in the high-margin Digital & Integration segment.
  
• Strategic realignment and cost-efficiency measures, particularly in U.S. land operations and support structures, are likely to enhance net margins through reduced operational costs.
  
• The focus on both conventional and unconventional gas projects, especially in the Middle East, indicates potential for revenue diversification and growth in new energy sectors.
  
• Commitment to returning value to shareholders through buybacks and dividends, supported by strong cash flow generation projections, underscores confidence in sustained earnings growth.

Assumptions

• Analysts are assuming Schlumberger's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.6% today to 17.5% in 3 years time.
• Analysts expect earnings to reach $7.6 billion (and earnings per share of $4.69) by about August 2027, up from $4.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $7.2 billion in earnings, and the most bearish expecting $6.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2027 earnings, up from 14.1x today. This future PE is lower than the current PE for the US Energy Services industry at 16.9x.
• Analysts expect the number of shares outstanding to decline by 0.09% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.32%, as per the Simply Wall St company report.

Risks

• The reliance on unconventional gas projects and the acceleration of gas development in key markets, particularly in the Middle East, might result in project execution risks or geopolitical tensions that could affect SLB's revenue and profit margins.
  
• Market consolidation and capital discipline, especially in North America, pose a risk to drilling operations and may result in lower-than-expected growth, impacting SLB's revenue from this region.
  
• The transition towards digital and AI technologies, while offering high margin growth opportunities, carries significant execution and competitive risks, potentially impacting net margins if adoption rates or project implementations lag expectations.
  
• The ongoing efforts to realign and optimize support and service delivery structure to drive margin expansion entail costs and disruption risks that could temporarily affect operating margins and earnings.
  
• SLB’s significant exposure to international markets for revenue growth introduces currency fluctuation risks, which could impact earnings due to the volatility in exchange rates.

Valuation

• The analysts have a consensus price target of $65.11 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 $74.0, and the most bearish reporting a price target of just $53.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $43.6 billion, earnings will come to $7.6 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $43.77, the analyst's price target of $65.11 is 32.8% 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.