Bank of America Merrill Lynch probed Schlumberger Limited.'s (NYSE:SLB) recent strategic direction with the company, showing its further diversification plans into completions and offshore equipment. Regarding the OneStim JV it announced with Weatherford recently, it clarified that both parties would deliver fully repaired and reactivated equipment to the JV at its own cost and contributed approximately two-thirds of the pressure pumping assets to the JV to WFT’s one-third. While it had downplayed interest in commoditized completion exposure in the past, SLB said this combination provided a more “value-add” approach and full-cycle returns to the U.S. completions market. It also noted WFT’s multi-stage completion technology made up most of the value of the $535M cash payment made to WFT as part of the deal.
SLB has confirmed its newly formed venture fund took a 20% stake in Borr Drilling, which recently said it agreed to purchase RIG’s jackup fleet for $1.4B. SLB viewed the jackup market as an attractive investment option given imminent expected activity recovery in H2, in addition to an outlet for its services and Cameron’s equipment.
Mgmt recently noted challenges collecting receivables from Ecuador, which had grown to over 10% of receivables, in addition to seasonal challenges and the roll-off of some Q4 software sales. The firm subsequently lowered Q1 EPS to $0.26, below a prior $0.29 and consensus $0.27. Continued challenges in offshore, equipment, and international land can stifle benefits of its U.S. land exposure through 2017E, in the firm's view.
BAML sees more limited upside for SLB given a defensive international presence and already elevated market share, more exposure to equipment and reservoir characterization, which could recover later in the cycle, and appropriate valuation. SLB was the most widely owned stock in the S&P 500 Energy sector in BAML's Quant Strategy team’s Active Manager Survey. BAML's $86/share PO reflects a 13x EV/EBITDA multiple on a more normal 2018E blended with 12x 2019E, still the high end of its historical range.