Share watch: Can the tedium of the oil sector last much longer?
Published 09/05/2016 | 02:30
The one thing that could always be said about the oil industry was that it had drama and romance. Even the movies reflected it. For instance, in 'The World is not Enough' 007 Pierce Brosnan battled to prevent the baddies increasing crude oil prices by saving a pipeline from nuclear attack. In 'Oklahoma Crude', the lovely and lonely Faye Dunaway needed a gunslinger to save her family 'gusher' from greedy competitors.
Now all that wonderful excitement and challenge that was part of the oil business is gone. Boredom has taken over. Eight years ago crude oil was being quoted at $150 a barrel, but last January it had plunged to $27.
Since the slump began gloom has prevailed. Several large oil concerns are scrambling to support their dividends while they cut or delay investment, hive off operations, and lay off staff.
This tedium and depression has clearly taken its toll on the oil services sector.
Our company this week, Schlumberger, the world's leading oil services provider, finds itself in this hostile environment. But this column has decided to cheer things up with the simple question: is the present turmoil a threat or an opportunity?
Schlumberger was founded 90 years ago by two brothers, Conrad and Marcel Schlumberger, in the French Alsace, to sell electrical equipment. Within three years of its formation it was operating in the USA and in 1962 was listed in New York. Today it is the number one oil services company, followed by Halliburton and Baker Hughes.
Recently it announced its intention to buy Cameron International, the world's largest producer of valves for controlling oil.
The acquisition marks a shift in the oil field services industry that until now operated at arm's length from each another.
This purchase is expected to be earnings enhancing and it also allows Schlumberger bundle oil gear and services into one package, so becoming a one-stop shop for crude oil producers.
The group provides a wide range of products and services, from exploration to production, for the oil and gas industry worldwide. Its services include mapping underground pockets of oil, well testing, operating oil rigs including drilling, flow assessment and much more including integrated project management and information solutions. It operates in more than 85 countries worldwide, from the intense heat of Africa to the cold Alaskan slopes.
Until recently, the company employed over 100,000 people but plans to reduce its headcount by 20,000.
Schlumberger is clearly massive with a market cap in excess of $105bn, even if its recent experience is so fraught.
Group revenue last year fell by more than a quarter to $35bn, its lowest in the last five years. Net income is now less than one third of the previous year's outcome of $6.8bn. Its biggest market, North America, saw revenues plunge 40pc last year to $10bn. Operating income was also hammered, declining by over two thirds. Nor did its international sales offer any relief, slipping 22pc, with operating profits down by a similar amount.
In spite of the challenging business landscape, the company generated free cash flow of $5bn last year and plans a $10bn share buyback. The landscape of the sector could be altered by the proposed merger of rivals Halliburton and Baker Hughes. However, it is being vigorously challenged by the US authorities.
Is Schlumberger worth a punt? In my opinion, yes. Examination of its 10-year share price movement shows its highest price at $110 in mid 2014. Today it is $75. In the last year its high was $95 and its low at $60. While the oil services sector is challenging, Schlumberger is the best in its class and if earnings are strained, sustain cost discipline helps. In addition, it has the ability to invest in the downturn and will be well positioned for a 2017 recovery.
The pickup is under way and surely the boring phase for the oil sector is coming to an end.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.