Schlumberger N.V.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Schlumberger (SLB) is a global technology company, providing technology solutions for oil and gas production and distribution and is now pivoting to new energy technologies.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Schlumberger N.V., now known just as SLB, is a global technology company that primarily offers its services in the energy production and distribution market. It is a behemoth that helps companies around the globe extract and analyze oil and gas from the earth through various processes, including reservoir characterization, well construction, production optimization, and midstream processing. SLB has recently expanded into new energy markets, including carbon capture, hydrogen, and geothermal energy.

SLB is a large, multi-faceted company, its offerings are divided into four main segments:

  • Digital & Integration: This segment combines digital technologies and domain expertise to optimize performance across the oil and gas and new energy industries.
  • Reservoir Performance: This division provides technologies and services to analyze geology, and to plan and execute well intervention and stimulation activities for improved oil and gas recovery.
  • Well Construction: This part specializes in designing and drilling wells, and has an expertise in well completion, directional drilling, and other areas of expertise needed for well manufacturing.
  • Production Systems: This segment offers various technologies and services for improving hydrocarbon extraction and enhancing production.

Schlumberger generates revenue from sales of its services and products, including equipment and technology licensing. Revenue distribution is split amongst all the geographic locations it serves, but the majority comes from North and Latin America. It also derives a large portion of its revenue from international markets, primarily in Asia, Europe, the Middle East, and Africa.

The oil and gas industry is very complex, with many players, often competing with each other, but it also has strong structural support, as high upfront costs and regulatory barriers often limit entry. This creates an attractive ecosystem for established players like SLB that can service the market, but has also made the market for Oil Service Companies like SLB more prone to consolidation. Currently, there are very few main players in this space. Oil prices and global macro economic conditions are also big factors that influence both the spending of SLB’s customers as well as the growth of emerging and new technologies.

The company is trying to transition into new energy services, but it is in its early stages and still requires a significant amount of resources. Their strategy revolves around their expertise in the energy sector, and to try to find ways for companies to effectively extract resources from the earth. They are developing digital solutions for carbon capture and storage, hydrogen production, and geothermal energy. Their approach also seeks to capture value from existing opportunities (such as production, well construction, and reservoir performance) while preparing the shift towards the new energy market.

Competitive Landscape

The Oil & Gas services industry has some very strong incumbents with well-established business that have been going on for decades. Here are a few of its major players, which also act as SLB’s competitors:

  • Halliburton
  • Baker Hughes
  • Weatherford
  • NOV

Schlumberger is differentiated by several factors.

One is its expertise and experience in reservoir characterization. It possesses advanced digital capabilities that help customers understand how to exploit their natural resources effectively and make smart drilling and production decisions. Secondly, it has a very vast global footprint with a presence in over 100 countries, which gives it better customer access and market expertise. Finally, it continues to invest in research and development to generate new solutions for its customers.

However, all the big Oil and Gas services companies are trying to diversify into renewable energy, therefore the competition will be stiff. All these large players are also trying to pivot their business and adapt with digital technologies, and data analytics, so it is extremely important to consider technological developments when understanding SLB’s future prospects.

Moat Analysis: 3 / 5

SLB’s moat can be described as narrow-to-mid, characterized by some sources of competitive advantage but also faces challenges in maintaining profitability.

The company has a decent moat that stems from its broad service offerings and long term contracts with clients that result in some switching costs, and its global scale that allows it to participate in a variety of opportunities. Also its focus on research and development helps them keep ahead of the competition in certain key areas and build patents and technological barriers to entry in some areas.

However, their moat isn’t as strong because their biggest competition is also very large, and there is often fierce competition on prices in their area of the industry that can shrink profitability. They also face a high degree of sensitivity to the business cycle and oil prices.

  1. Intangible Assets: SLB possesses strong brand recognition, technical know-how, and client relationships that have been built over decades of operating, which is an advantage and gives it a slight edge over newer companies. But the brand is not as valuable and resilient as others.
  2. Switching Costs: The integration of SLB’s services and software into customer’s workflows creates some switching costs, which often lock customers into using SLB products, as changing is costly and requires more training. But this not a full lock as clients can change to any competitor, given enough time.
  3. Cost Advantages: Schlumberger can achieve lower costs than some competitors via their global supply chain and economies of scale, but other players have just as robust supply chains and are able to offer services for similar prices. Also as most of these services are commoditized, it is hard to differentiate oneself in price.
  4. Network Effects: A strong network effect does not apply much to SLB’s market, because customers do not gain additional value as more firms choose to work with SLB. Even though this could give some sort of benefit in the software sector that they operate in, it isn’t relevant for the large majority of their business.

Risks to Moat & Business Resilience

Several risks could impact SLB’s long-term profitability and moat.

  1. Industry Cyclicality: SLB is highly correlated to the oil and gas industry cycle, therefore its sales and margins fluctuate with changes in oil and gas prices. Since 2014, prices have generally been lower, and there has been less investment in exploration and production, hence affecting SLB negatively. On the other hand, when prices are high there is a very large growth in demand for services. This makes the sector very volatile. Even with its pivot towards new energy, they are not completely removed from this cyclical nature.
  2. Technological Disruption: New technologies are constantly developing in the energy space, which could result in their solutions becoming quickly obsolete, and the company needs to always be ahead of the competition and implement the new technology as fast as possible.
  3. Political and Regulatory Risks: The oil and gas industry is impacted by political decisions and regulations by both producing nations as well as countries that import. Government regulations can drastically affect demand as well as the economics of some solutions like the new energy initiatives, such as carbon capture.
  4. Competition: As discussed earlier, they face stiff competition from other major oil and gas service companies as well as other new entrants into the new energy market.

To ensure the sustainability of the company, management must continue to develop and integrate new technologies as well as grow their business and customer base in their newly targeted industries while keeping costs and debt low. Having a solid balance sheet will also be key during times of business cycle downturns to protect them against any financial uncertainty.

Financials: In Depth

SLB’s latest financial results show that the company has been able to increase their revenue during the past year, driven mainly by increased demand for its oil services, thanks to the surge in oil prices in 2022 and 2023. Although the market is facing headwinds, SLB has maintained profits and had positive cash flows.

Income Statement:

  • Revenues for the last three quarters in 2024 equaled $15.9 billion.
  • Profitability: Net income for the same period is around $3.6 billion.
  • Gross margin: Historically the company has had strong margins in the 20-30% range but this number can swing in accordance with general economic conditions and the level of demand. Recent results have shown that their gross profit margins are around 23%, down from the 2010’s highs.
  • Earnings per share are around $2.3 per share for the last nine months.

Cash flow statement:

  • Net cash provided by operating activities in the last nine months totals $3.7 billion.
  • Capital expenditures totaled $1.1 billion in the same period.
  • Free cash flow equaled $2.7 billion.

Balance sheet:

  • Assets: Total assets are $49.7 billion.
  • Debt: Long-term debt is $10.5 billion, with a debt to equity ratio around 0.8. This amount of debt seems healthy for a business with stable revenue stream like this.
  • Equity: Total shareholders equity was $31.5 billion.
  • The company has a good liquidity position with a significant cash balance and short term investment reserves that are equal to more than $13.9 billion.
  • The company also has very high credit ratings from the rating agencies, meaning a very low probability of any debt defaults or problems with debt servicing.
  • A reasonable inventory turnover ratio that is between 3 to 4 months.

Recent changes in accounting rules regarding goodwill has seen a reduction in net equity and assets, but is still a relatively good position that can allow them to fund growth initiatives and to sustain their business during economic downturns. The company has enough liquid assets in place to easily handle any major short term liabilities that it may face.

Recent Developments & Controversies

SLB has had to deal with certain controversies over the past few years.

  1. Russian Operations: Following the invasion of Ukraine, the company has had to deal with the complexities of scaling down operations in Russia.
  2. Accounting Rules: There have been some changes to accounting policies around amortization of intangibles that has reduced the overall stated profitability of the company in the recent results.
  3. Layoffs: The company has also had to lay off employees to keep its workforce appropriate for the expected market conditions and their business needs.
  4. Inflation : The company’s operations and business are not immune to high inflation, which has increased their operational expenses, and there is also potential impact on the global supply chain as well.
  5. New Energy Transition : As they are in the process of trying to transition, they have to allocate more resources to new industries that they are trying to enter, thus increasing risk as well.

Despite these challenges, the company’s long term prospects are very bright and their management seem to be making the necessary adjustments to compete in this space.

Understandability: 3 / 5

SLB has a very complex business structure, that is not immediately easy to understand. It has different moving parts with many different industries involved, and understanding how all of these moving parts interact will take a bit of time and effort. It is a complex business that requires lots of analysis to understand how revenue is structured, and where it is coming from.

Balance Sheet Health: 4 / 5

SLB’s balance sheet is in good standing with low to moderate debt levels, a high current ratio, and very strong solvency ratios that should provide for a solid base for future growth and investments. They have enough liquid assets to cover liabilities that should provide for a cushion during uncertain times.

Overall, it is a well established business with a decent moat, but it remains sensitive to outside economic factors that influence the Oil & Gas industry. The company is pivoting towards a new industry while maintaining operations in its current one, with its biggest challenge being long term strategic vision and execution.