Overvalued Schlumberger Is a Stock to Avoid
If you think oil-and-gas drilling giant Schlumberger (SLB) - Get Report has turned the corner and constitutes a "conviction buy," as many analysts now contend, I have a bridge that I'd like to sell you.
As we reveal below, there are better places for your money. But first, let's examine the bill of particulars against Schlumberger, which is deeply indebted and overvalued.
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Fueling the optimism over Schlumberger is the latest rig count from oilfield services firm Baker Hughes, which reported today that the number of active U.S. oil rigs rose by 11 to 341 this week, marking the fourth week of rises over the past five weeks.
At the same time, oil prices have been rising. West Texas Intermediate, the U.S. benchmark, is hovering at $49 a barrel and Brent North Sea Crude, on which international oils are priced, is hovering at the important threshold of $50 a barrel. Those levels are certainly better than the $20s that oil reached in February. Many analysts, notably Goldman Sachs , are now loudly proclaiming that the long-beleaguered energy patch has finally found bottom.
Amid the enthusiasm, certain fundamentally weak oil sector stocks have been bid to ludicrous heights, as investors choose to ignore glaring balance sheet problems, not to mention weaknesses in the global economy.
The starkest case in point is Schlumberger, which has been on a tear lately. Over the past month and year to date, Schlumberger is up 5.33% and 13.92%, respectively, compared to -0.40% and 3.04% over the same time frames for the S&P 500. But this spate of exuberance flies in the face of Schlumberger's massive debt and poor earnings prospects.
Schlumberger is scheduled to release its next operating results on July 21, for the second quarter ending June 30. The average analyst consensus is that earnings per share (EPS) will come in at 22 cents, compared to 88 cents in the same quarter a year ago. For the third quarter, the estimate is 23 cents compared to 78 cents. For full-year fiscal 2016, EPS is pegged at $1.14, compared to $3.37 in 2015.
Schlumberger now trades at an absurdly high trailing price-to-earnings ratio (P/E) of 62.77, compared to 18.25 for its industry. Meanwhile, Schlumberger's debt has been rising, even as contracts from majors such as Exxon Mobil and Chevron have been dwindling. Schlumberger's net debt-to-TTM (trailing 12-month) earnings before interest, tax, depreciation, and amortization (EBITDA) rose from the fiscal first quarter of 2015 through the same period a year later. In the fiscal first quarter of 2016, Schlumberger's net debt-to-EBITDA multiple more than doubled compared to a year ago.
Schlumberger's debt-to-equity ratio (in the most recent quarter) stands at 0.60, which is extremely high compared to the energy sector's average debt-to-equity ratio of 0.39. As contracts expire and new ones are tough to find, Schlumberger will find it increasingly difficult to service its total debt of $21.51 billion.
The global equity markets have enjoyed a nice rally this week, but triggers for a correction lurk around every corner. A flare-up of the Brexit crisis, terrorist attack, bad news from China, or a disappointing economic statistic could send energy prices, and an overvalued Schlumbeger, tumbling again. Buyer beware.
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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.