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Should Investors Steer Clear of SLB Stock After Q2 Earnings?
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Last week, SLB (SLB - Free Report) reported strong second-quarter 2024 results, driven by widespread activities in the international market and margin improvements across all business segments. Despite the oilfield service giant's core business capitalizing on its favorable momentum, the overall business outlook is not impressive.
Before delving into the underlying reasons for the subdued outlook and addressing the critical question of how investors should strategically position themselves regarding the stock, let’s first review the second-quarter results.
Impressive Q2 Earnings
On Jul 19, SLB, carrying a Zacks Rank #4 (Sell), reported second-quarter 2024 earnings of 85 cents per share (excluding charges and credits), which beat the Zacks Consensus Estimate of 83 cents. The bottom line increased from the year-ago quarter’s level of 72 cents. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The oilfield service giant recorded total quarterly revenues of $9.14 billion, which beat the Zacks Consensus Estimate of $9.07 billion. The top line also improved from the year-ago quarter’s figure of $8.10 billion.
These results underscore a robust performance across all operating segments, showcasing significant contributions from each area of the business. For a detailed analysis, read our blog on second-quarter earnings: SLB Q2 Earnings Beat Estimates, Revenues Rise Year Over Year.
Like SLB, Halliburton Company (HAL - Free Report) , another major player in the oilfield services sector, also released its second-quarter 2024 earnings report on Jul 19. For more details, check out our blog: Halliburton (HAL - Free Report) Q2 Earnings in Line with International Growth.
North American Rig Count Drop Sparks Alarm
Baker Hughes Company (BKR - Free Report) reported the North American rig count of 738 for the June quarter, a notable decline from 831 rigs in the previous quarter and 803 rigs in the fourth quarter of 2023. This reduction is indicative of a broader trend where exploration and production companies are probably implementing cuts in their capital expenditure budgets for drilling activities. This shift is primarily due to increased pressure from shareholders, who are advocating for capital returns over further investments in exploration and production.
Image Source: Baker Hughes Company
The U.S. Energy Information Administration, in its latest short-term energy outlook, forecasts U.S. crude oil production at 13.2 million barrels per day (MMB/D) for this year, up from 12.9 MMB/D in 2023 and 11.9 MMB/D in 2022. Despite this overall increase in production, the growth rate is expected to slow down to 2.3% in 2024, a significant deceleration from the 8.4% growth observed in 2023. This decline underscores a broader trend of reduced drilling activities in North America, which could diminish demand for services from major oilfield service provider SLB.
The rig count data from Baker Hughes also indicates a slowdown in drilling activities in the international market, which significantly contributes to SLB's revenues. Consequently, the demand for SLB's services, such as reservoir productivity and performance optimization, is expected to decline in both North American and international markets. These company-specific risk factors are reflected in SLB's price performance. Year to date, the stock has lost 3.9% against the industry’s growth of 5%.
Image Source: Zacks Investment Research
Debt Refinancing & Overvaluation
The issuance of $1.5 billion of bonds in the second quarter to refinance debt obligations could be seen as a negative aspect, indicating a significant level of debt that requires careful management to avoid financial strain.
Despite the year-to-date 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 9.49, which is trading at a premium compared to the broader industry average of 7.78.
Image Source: Zacks Investment Research
Time to Get Rid of the Stock
Given that SLB's overall business outlook remains bearish despite its strong second-quarter results and considering its overvaluation, it would be wise to sell this stock.
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Should Investors Steer Clear of SLB Stock After Q2 Earnings?
Last week, SLB (SLB - Free Report) reported strong second-quarter 2024 results, driven by widespread activities in the international market and margin improvements across all business segments. Despite the oilfield service giant's core business capitalizing on its favorable momentum, the overall business outlook is not impressive.
Before delving into the underlying reasons for the subdued outlook and addressing the critical question of how investors should strategically position themselves regarding the stock, let’s first review the second-quarter results.
Impressive Q2 Earnings
On Jul 19, SLB, carrying a Zacks Rank #4 (Sell), reported second-quarter 2024 earnings of 85 cents per share (excluding charges and credits), which beat the Zacks Consensus Estimate of 83 cents. The bottom line increased from the year-ago quarter’s level of 72 cents. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The oilfield service giant recorded total quarterly revenues of $9.14 billion, which beat the Zacks Consensus Estimate of $9.07 billion. The top line also improved from the year-ago quarter’s figure of $8.10 billion.
These results underscore a robust performance across all operating segments, showcasing significant contributions from each area of the business. For a detailed analysis, read our blog on second-quarter earnings: SLB Q2 Earnings Beat Estimates, Revenues Rise Year Over Year.
Like SLB, Halliburton Company (HAL - Free Report) , another major player in the oilfield services sector, also released its second-quarter 2024 earnings report on Jul 19. For more details, check out our blog: Halliburton (HAL - Free Report) Q2 Earnings in Line with International Growth.
North American Rig Count Drop Sparks Alarm
Baker Hughes Company (BKR - Free Report) reported the North American rig count of 738 for the June quarter, a notable decline from 831 rigs in the previous quarter and 803 rigs in the fourth quarter of 2023. This reduction is indicative of a broader trend where exploration and production companies are probably implementing cuts in their capital expenditure budgets for drilling activities. This shift is primarily due to increased pressure from shareholders, who are advocating for capital returns over further investments in exploration and production.
The U.S. Energy Information Administration, in its latest short-term energy outlook, forecasts U.S. crude oil production at 13.2 million barrels per day (MMB/D) for this year, up from 12.9 MMB/D in 2023 and 11.9 MMB/D in 2022. Despite this overall increase in production, the growth rate is expected to slow down to 2.3% in 2024, a significant deceleration from the 8.4% growth observed in 2023. This decline underscores a broader trend of reduced drilling activities in North America, which could diminish demand for services from major oilfield service provider SLB.
The rig count data from Baker Hughes also indicates a slowdown in drilling activities in the international market, which significantly contributes to SLB's revenues. Consequently, the demand for SLB's services, such as reservoir productivity and performance optimization, is expected to decline in both North American and international markets. These company-specific risk factors are reflected in SLB's price performance. Year to date, the stock has lost 3.9% against the industry’s growth of 5%.
Debt Refinancing & Overvaluation
The issuance of $1.5 billion of bonds in the second quarter to refinance debt obligations could be seen as a negative aspect, indicating a significant level of debt that requires careful management to avoid financial strain.
Despite the year-to-date 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 9.49, which is trading at a premium compared to the broader industry average of 7.78.
Time to Get Rid of the Stock
Given that SLB's overall business outlook remains bearish despite its strong second-quarter results and considering its overvaluation, it would be wise to sell this stock.