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SLB (SLB - Free Report) is currently considered expensive on a relative basis, with the stock trading at a trailing 12-month Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA) of 8.05x, which is a premium compared with the broader industry average of 7.12x. Although a premium valuation indicates that the market has strong confidence in the company’s prospects, it necessitates scrutiny to determine if this higher price is warranted.
Image Source: Zacks Investment Research
Heavy Dependence on the Middle East & Asia to Hurt SLB
In the third quarter of 2024, SLB derived 36% of its total revenues from operations in the Middle East and Asia, making this region the largest contributor to the company's total revenues. Given the Middle East's history of geopolitical instability, including wars, civil unrest and tensions among major oil-producing nations, SLB remains significantly exposed to risks unique to these areas.
Notably, the energy market in the Middle East is heavily influenced by government regulations, as many nations manage oil production and exports. Thus, shifts in policies can have a direct effect on SLB's operations and agreements.
Also, global oilfield services companies are attracted to the Middle East and Asia because of the region's vast and extensive oil and natural gas reserves and active projects. This heightened competition may put downward pressure on SLB's pricing, potentially reducing its margins and market share.
SLB Grapples With Weakness in North American Operations
Explorers and producers in North America, particularly in the United States, are now primarily focused on returning capital to shareholders rather than making large investments in increased production. This shift aligns with investor preferences. This capital discipline is reflected in the stagnant rig count data from Baker Hughes Company (BKR - Free Report) .
In October, North America recorded a total of 804 rigs, consistent with the previous month’s count, according to BKR data. However, this rig count was lower than the 814 rigs recorded a year ago.
Image Source: Baker Hughes Company
Thus, slowing drilling and upstream activities in North America will continue to result in lower demand for SLB’s services, such as reservoir productivity and performance optimization.
SLB’s Modest Revenue Growth Despite Digital Investments
Although SLB is making substantial investments in digital transformation and artificial intelligence (AI)-driven solutions, these efforts have yet to result in notable revenue growth. This is evident in the company's modest 0.2% sequential revenue increase in the third quarter of this year. The slow pace of growth may raise concerns about the short-term effectiveness of these strategies.
Is SLB’s Premium Valuation Justified?
All these weaknesses are evident in SLB's price chart. Year to date (YTD), the stock has lost 15.3%, underperforming Halliburton Company’s (HAL - Free Report) 12.4% decline and the 2.9% gain of the industry’s composite stocks. This could indicate ongoing investor concerns about the company’s ability to restore its previous levels of profitability.
YTD Price Performance
Image Source: Zacks Investment Research
Thus, despite SLB continuing to benefit from long-cycle projects in deepwater and gas, especially in offshore North America and the Middle East, which provide a stable revenue stream even when short-cycle activities are weak, its premium valuation may not be warranted. Therefore, it might be wise to avoid investing in the stock at its current overvalued price. The stock currently carries a Zacks Rank #4 (Sell).
Image: Bigstock
Time to Assess SLB's Premium Stock Valuation: Buy, Sell, or Hold?
Key Takeaways
SLB (SLB - Free Report) is currently considered expensive on a relative basis, with the stock trading at a trailing 12-month Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA) of 8.05x, which is a premium compared with the broader industry average of 7.12x. Although a premium valuation indicates that the market has strong confidence in the company’s prospects, it necessitates scrutiny to determine if this higher price is warranted.
Heavy Dependence on the Middle East & Asia to Hurt SLB
In the third quarter of 2024, SLB derived 36% of its total revenues from operations in the Middle East and Asia, making this region the largest contributor to the company's total revenues. Given the Middle East's history of geopolitical instability, including wars, civil unrest and tensions among major oil-producing nations, SLB remains significantly exposed to risks unique to these areas.
Notably, the energy market in the Middle East is heavily influenced by government regulations, as many nations manage oil production and exports. Thus, shifts in policies can have a direct effect on SLB's operations and agreements.
Also, global oilfield services companies are attracted to the Middle East and Asia because of the region's vast and extensive oil and natural gas reserves and active projects. This heightened competition may put downward pressure on SLB's pricing, potentially reducing its margins and market share.
SLB Grapples With Weakness in North American Operations
Explorers and producers in North America, particularly in the United States, are now primarily focused on returning capital to shareholders rather than making large investments in increased production. This shift aligns with investor preferences. This capital discipline is reflected in the stagnant rig count data from Baker Hughes Company (BKR - Free Report) .
In October, North America recorded a total of 804 rigs, consistent with the previous month’s count, according to BKR data. However, this rig count was lower than the 814 rigs recorded a year ago.
Thus, slowing drilling and upstream activities in North America will continue to result in lower demand for SLB’s services, such as reservoir productivity and performance optimization.
SLB’s Modest Revenue Growth Despite Digital Investments
Although SLB is making substantial investments in digital transformation and artificial intelligence (AI)-driven solutions, these efforts have yet to result in notable revenue growth. This is evident in the company's modest 0.2% sequential revenue increase in the third quarter of this year. The slow pace of growth may raise concerns about the short-term effectiveness of these strategies.
Is SLB’s Premium Valuation Justified?
All these weaknesses are evident in SLB's price chart. Year to date (YTD), the stock has lost 15.3%, underperforming Halliburton Company’s (HAL - Free Report) 12.4% decline and the 2.9% gain of the industry’s composite stocks. This could indicate ongoing investor concerns about the company’s ability to restore its previous levels of profitability.
YTD Price Performance
Thus, despite SLB continuing to benefit from long-cycle projects in deepwater and gas, especially in offshore North America and the Middle East, which provide a stable revenue stream even when short-cycle activities are weak, its premium valuation may not be warranted. Therefore, it might be wise to avoid investing in the stock at its current overvalued price. The stock currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.