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Should You Buy, Sell, or Hold SLB Stock Before Q2 Earnings?
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SLB (SLB - Free Report) is set to report second-quarter 2024 results on Jul 19, 2024, before the opening bell.
The Zacks Consensus Estimate for second-quarter earnings is pegged at 83 cents per share, implying growth of 15.3% from the year-ago reported number. The estimate was revised upward by one analyst in the past 30 days against two downward movements, making the earnings estimate remain the same at 83 cents per share. The Zacks Consensus Estimate for second-quarter revenues is currently pegged at $9.1 billion, indicating an 11.9% uptick from the year-ago actuals.
Image Source: Zacks Investment Research
SLB beat the consensus estimate for earnings in all the trailing four quarters, with the average surprise being 1.6%. This is depicted in the graph below:
Our proven model does not conclusively predict an earnings beat for SLB this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold) increases the chances of an earnings beat. That is not the case here.
The company has an Earnings ESP of -0.50%. This is because the Most Accurate Estimate currently stands at 82 cents per share, lower than the Zacks Consensus Estimate of 83 cents. SLB currently carries a Zacks Rank #4 (Sell).
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Factors Shaping Q2 Results
According to the U.S. Energy Information Administration, the average spot prices for West Texas Intermediate crude at Cushing, OK, were $85.35 per barrel in April, $80.02 per barrel in May, and $79.77 per barrel in June. This indicates that the crude pricing environment in the second quarter was highly favorable for exploration and production activities. Despite this favorable pricing, drilling activities declined both domestically and internationally.
Baker Hughes Company (BKR - Free Report) reported in its quarterly rig count that the number of rigs operating in North America during the June quarter was 738, down from 831 rigs in the first quarter. In the international market, the count was 963 in the second quarter, which also declined from the prior quarter.
The decrease in drilling activities in both domestic and international markets suggests that explorers and producers likely spent less on upstream activities. Lower spending by customers is likely to have affected the demand for services provided by the leading oilfield service provider SLB. The Zacks Consensus Estimate for the company’s operating earnings before tax from the Well Construction business is pegged at $727 million, lower than $731 million in the year-ago quarter. Notably, the Well Construction business unit, which focuses on maximizing drilling efficiency and optimizing well placement and performance, is the major revenue contributor among all the business segments.
Price Performance & Valuation
SLB's stock has exhibited a downward movement in the year-to-date period. The stock has lost 5.8% against the industry’s growth of 5.5% in the same time frame. Halliburton Company (HAL - Free Report) , another leading player in the oilfield service space, gains a nominal 0.5% over the same time frame.
YTD Price Performance
Image Source: Zacks Investment Research
Despite the recent 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 9.56X, which is trading at a premium compared to the broader industry average of 7.81X.
Image Source: Zacks Investment Research
Investment Thesis
The underperformance of the stock price compared with the industry is a clear reflection of the company-specific risk. Weakness in the North American market is probably affecting the stock price performance. The potential for a cut in capital spending by the explorers and producers in the major basins in North America and the end of the U.S. shale revolution will continue to lower demand for products and services offered by SLB.
Huge dependence on the international market is also posing a significant threat to the company’s operations. This is because exposures in the Middle Eastern markets introduce significant geopolitical and operational risks to its operations.
Last Word
SLB's overall business is expected to remain in a bearish phase due to declining drilling activities among upstream companies globally. This reduction in capital expenditures by SLB's customers has likely dampened demand for the company's products and services throughout the second quarter, with indications that this trend will persist. Consequently, given its current overvaluation, it would be prudent to sell this stock.
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Should You Buy, Sell, or Hold SLB Stock Before Q2 Earnings?
SLB (SLB - Free Report) is set to report second-quarter 2024 results on Jul 19, 2024, before the opening bell.
The Zacks Consensus Estimate for second-quarter earnings is pegged at 83 cents per share, implying growth of 15.3% from the year-ago reported number. The estimate was revised upward by one analyst in the past 30 days against two downward movements, making the earnings estimate remain the same at 83 cents per share. The Zacks Consensus Estimate for second-quarter revenues is currently pegged at $9.1 billion, indicating an 11.9% uptick from the year-ago actuals.
SLB beat the consensus estimate for earnings in all the trailing four quarters, with the average surprise being 1.6%. This is depicted in the graph below:
SLB Price and EPS Surprise
SLB price-eps-surprise | SLB Quote
Q2 Earnings Whispers
Our proven model does not conclusively predict an earnings beat for SLB this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold) increases the chances of an earnings beat. That is not the case here.
The company has an Earnings ESP of -0.50%. This is because the Most Accurate Estimate currently stands at 82 cents per share, lower than the Zacks Consensus Estimate of 83 cents. SLB currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank stocks here.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Factors Shaping Q2 Results
According to the U.S. Energy Information Administration, the average spot prices for West Texas Intermediate crude at Cushing, OK, were $85.35 per barrel in April, $80.02 per barrel in May, and $79.77 per barrel in June. This indicates that the crude pricing environment in the second quarter was highly favorable for exploration and production activities. Despite this favorable pricing, drilling activities declined both domestically and internationally.
Baker Hughes Company (BKR - Free Report) reported in its quarterly rig count that the number of rigs operating in North America during the June quarter was 738, down from 831 rigs in the first quarter. In the international market, the count was 963 in the second quarter, which also declined from the prior quarter.
The decrease in drilling activities in both domestic and international markets suggests that explorers and producers likely spent less on upstream activities. Lower spending by customers is likely to have affected the demand for services provided by the leading oilfield service provider SLB. The Zacks Consensus Estimate for the company’s operating earnings before tax from the Well Construction business is pegged at $727 million, lower than $731 million in the year-ago quarter. Notably, the Well Construction business unit, which focuses on maximizing drilling efficiency and optimizing well placement and performance, is the major revenue contributor among all the business segments.
Price Performance & Valuation
SLB's stock has exhibited a downward movement in the year-to-date period. The stock has lost 5.8% against the industry’s growth of 5.5% in the same time frame. Halliburton Company (HAL - Free Report) , another leading player in the oilfield service space, gains a nominal 0.5% over the same time frame.
YTD Price Performance
Despite the recent 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 9.56X, which is trading at a premium compared to the broader industry average of 7.81X.
Investment Thesis
The underperformance of the stock price compared with the industry is a clear reflection of the company-specific risk. Weakness in the North American market is probably affecting the stock price performance. The potential for a cut in capital spending by the explorers and producers in the major basins in North America and the end of the U.S. shale revolution will continue to lower demand for products and services offered by SLB.
Huge dependence on the international market is also posing a significant threat to the company’s operations. This is because exposures in the Middle Eastern markets introduce significant geopolitical and operational risks to its operations.
Last Word
SLB's overall business is expected to remain in a bearish phase due to declining drilling activities among upstream companies globally. This reduction in capital expenditures by SLB's customers has likely dampened demand for the company's products and services throughout the second quarter, with indications that this trend will persist. Consequently, given its current overvaluation, it would be prudent to sell this stock.