Schlumberger Slips To Sell On Lower US Shale Play Exposure

On Jul 11, oilfield service player Schlumberger Limited (NYSE:SLB) was downgraded to a Zacks Rank #4 (Sell).

Key Factors

In term of upstream operations, North America is the most active region in the world. As per the latest rig count data released by Baker Hughes Incorporated (NYSE:BHGE) , shale players in the U.S. have started returning to oil patches following the rare fall in the weekly U.S. rig count last week. We can say that exposure to those resources is lucrative for oilfield services players that can clinch significant contracts for setting up oil and gas wells.

Unfortunately, Schlumberger has lesser exposure to shale resources as is reflected from the fact that during 2016, 2015 and 2014, the oilfield service player generated 80%, 76% and 71% of consolidated revenues from non-U.S. operations. Thus, the company has been losing out on the opportunity to gain profitable contracts from shale drillers of late.

Moreover, since 2014, long-term debt at Schlumberger has been on the rise, which is a matter of concern. Also, the company’s cash balances have been on the decline over the last five quarters. Investors should also note that the company has to comply with stringent U.S. laws to ensure that its activities do not pollute the environment. For this, Schlumberger has to incur significant expenses that might dent earnings and also dent shareholders’ returns.

On top of that, along with the broader industry, Schlumberger’s stock price declined over the last one year. During the aforesaid period, shares of the company have lost almost 18%, compared with the 20.9% decline of the Zacks categorized Oil & Gas-Field Services industry.

Owing to those events, the Zacks Consensus Estimate for the company’s 2017 earnings has been slashed to $1.46 per share from $1.49 over the last 60 days.

Stocks to Consider

A few better-ranked players in the energy sector are Canadian Natural Resources Limited (TO:CNQ) and Pembina Pipeline Corporation (NYSE:PBA) . Both Canadian Natural and Pembina Pipeline sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

We expect year-over-year earnings growth of almost 725% at Canadian Natural in 2017.

Pembina Pipeline’s 2017 earnings will likely grow over 87% year over year.

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