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Oil services company Schlumberger is cutting 21,000 jobs after a disastrous quarter. Analysts are optimistic.
Schlumberger’s (ticker: SLB) second-quarter results, released Friday morning, were grim at first glance: a 35% year-over-year revenue decline and a plan to cut a quarter from staff. But analysts now seem convinced the worst is behind the company, focusing on a positive surprise in the bottom line and on the administration’s strategy to quickly adapt to the post-Covid era.
Schlumberger, the world’s largest oil services company, reported total revenue of $ 5.36 billion in the second quarter, down 28% from the previous quarter and 35% from the same period in 2019. The company also said that It will cut the jobs of more than 21,000 employees: 24.7% of the approximately 85,000 employees it had in more than 120 countries through June.
“This has probably been the most challenging quarter in recent decades,” Chief Executive Olivier Le Peuch said in a statement on Friday. Le Peuch attributed the drop in revenue to “the historical imbalances in demand and supply of oil caused by the destruction of demand from the global containment effort of COVID-19”.
North American sales fell 58% yoy. International sales, representing approximately three-quarters of Schlumberger’s total revenue, fell 24%.
Schlumberger exceeded investor expectations for the bottom line. Excluding $ 3.7 billion in impairment charges, the company had non-GAAP net income of $ 69 million. Based on the adjusted figure, earnings per share ended at 5 cents, outweighing the loss of one penny per share, according to a FactSet survey analysts expected.
Schlumberger management said the company would continue to tighten its belt. “We are permanently eliminating $ 1.5 billion of structural costs annually by reorganizing Schlumberger into a more agile and responsive company,” Le Peuch told investors.
According to CFO Stephane Biguet, Schlumberger had accomplished around 40% of the streamlining in June and aims to complete most of the rest, which is largely related to international operations, by the end of 2020.
Schlumberger had already begun restructuring in North America last year and accelerated movement during the pandemic. So far, the company has closed nearly 150 operations facilities, focusing on reducing fixed and infrastructure expenses, Le Peuch said. By June, 18,000 employees had left the company, a Schlumberger spokesman said. Barron’s.
In the short term, “oil demand is slowly starting to normalize and is expected to improve as government measures support consumption,” Le Peuch said. “However, any other material disruption of COVID-19 or a significant setback in oil demand stemming from a slower economic recovery could present downside risks to this outlook.”
Analysts applauded better-than-expected earnings and cost reductions.
The result “has positive implications for the action,” James West told Evercore ISI in a note Friday. West focused on Schlumberger’s three strengths: the ability to generate free cash flow, which ended at $ 465 million in the second quarter; its relative resistance in international operations; and its rapid digital transformation, evidenced by an avalanche of contracts that include a joint development of digital drilling with Exxon Mobil (XOM).
“The company is rapidly becoming a lighter asset source, generative free cash flow as a percentage of revenue, and a key leader in the industry’s digital transition,” said West. He reiterated a top performance rating with a target of $ 28 for the stock price.
Cowen analyst Marc Bianchi also cited the strong gains as positive, holding shares in Outperform, with a target price of $ 27. For the third quarter, “earnings are expected to be flat and margins will be helped by savings of costs, mix and technology, “but since no details were given on how much margins could increase,” we’re flying a little blind, “Bianchi said in a note Friday.
Stephens analyst Tommy Moll remains a little cautious about Schlumberger’s potential. “While we applaud the new SLB leadership team for quickly streamlining / focusing the organization on its strengths,” Moll said, the action deserves only an Equal Weight rating until the company’s earnings power under the “new normality “after the second half of 2020 become clearer
Schlumberger shares rose 0.9% to $ 19.48 on Friday, while the S&P 500 fell 0.6%. Schlumberger is down 51.5% so far this year, while the S&P 500 is down 0.5%, although the stock has far outperformed the index in the past three months.
Schlumberger’s rival Halliburton (HAL) announced restructuring plans when it reported its earnings on Monday, saying it will cut thousands of jobs and cut its dividends.
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