Iberia Capital Anticipates Further Downside For Schlumberger

• The share price of Schlumberger Limited. (NYSE: SLB) has declined 22.86 percent over the past six months, trading almost at its 52-week low on October 1 at $67.65.
• Iberia Capital’s Robert MacKenzie has maintained an Outperform rating on the company, with a price target of $94.
• MacKenzie continues to expect North American margins to bottom in 4Q/1Q, with further international margin downside beyond 1Q. However, margins are expected to remain above the prior cycle lows.

Analyst Robert MacKenzie also said, however, “Still, SLB is our favorite "risk-off" way to play the OFS space due to the company's stellar operational execution and cost management.”

The EPS downside in 4Q is expected to be driven by meaningfully lower than expected activity levels in Latin America, along with steeper pricing pressure across almost all regions. Brazil and Mexico continue to see challenges related to budget constraints, which have led to a significant decline in activity.

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Slowdown, Downside And Margin Erosion Ahead

According to the Iberia Capital report, “A slowdown in drilling activity for the winter season in Europe/CIS/Africa not offset by typical year-end product sales and significant pricing pressure in the Middle East/Asia Pacific is driving lower-than-expected revenue and margin erosion in both segments in 4Q.”

In North America, activity levels have mostly been in-line with expectations, although further pricing pressure is expected to affect the top and bottom line. Revenue is expected to decline 14 percent quarter on quarter.

However, MacKenzie also noted that given Schlumberger’s “outstanding cost management throughout this cycle,” margins were expected to “bottom out above prior downturn lows.”

The 4Q and FY2016 EPS estimates have been lowered from $0.72 to $0.63 and from $3.15 to $2.45, respectively.

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