The 4.4% dividend yield is attractive but the free cash flow didn't cover the dividend in 2018. Also, during Q1, revenue increased by only 1% year-over-year while pretax operating income decreased 7%. And management expects land exploration and production (E&P) investments in North America to decline by about 10% in 2019.
At a forward P/E ratio of about 27, its valuation doesn't look like a bargain, either. But investing in the company is actually a bet on the recovery of the international oil and gas E&P expenses. Besides the short-term challenges, the company has the potential to take advantage of an industry upturn.
Recovery From the Bottom of the Cyclical Oil E&P BusinessBefore the drop of the oil prices about five years ago, Schlumberger was generating impressive margins from its international offshore business. Despite the recent improvement of its EBITDA margin, the company is still far from its peak performance of 2014.
The higher cost of capital, lower borrowing capacity and investors looking for increased returns suggest that future E&P investments will likely be at levels dictated by free cash flow .