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Jim Cramer's Action Alerts PLUS

Schlumberger Reports Bottom-Line Beat

By Jim Cramer and Jack Mohr | 10/20/16 - 05:05 PM EDT
Stocks in Focus: SLB

Schlumberger (SLB:NYSE) reported a third-quarter bottom-line beat after today's close, with EPS of $0.25 coming in 3 cents ahead of consensus expectations. Revenues of $7.02 billion (down 17.2% year over year) narrowly missed consensus. Notably, investors expected the decline in sales, largely due to continued pressure in the energy environment and the expected reduction of activity at Cameron due to a known decline in the product order backlog.

Digging deeper, on a sequential basis, revenues actually increased 1%, excluding the addition of Cameron's operations. This increase in revenue leveraged management's strong execution and transformation efforts to generate incremental margins north of 65%, excluding the effects of last quarter's impairment charges. Free cash flow generation of $699 million in the quarter also proved to be a positive, outpacing sell-side estimates. The solid performance here is an indication of management's discipline on capex investments, a trait that has been essential for top-tier companies to hone throughout the oil downturn. Management maintained capex guidance of $2 billion for fiscal 2016.

Perhaps most importantly, Schlumberger and its management team are typically perceived by the markets as the industry leaders, owning the most in-depth knowledge on the progress of the energy sector and the outlook moving forward. As such, the conference call (details below) tends to be one of the most important pieces of the quarterly release.

That being said, the company did note in the print that visibility into investments from its E&P customers continues to remain limited as these companies remain in the planning process as they navigate the oil recovery. SLB management reiterated their view that this will not be a simple V-shaped recovery given the continued fragile state of the industry. Reasons for optimism do exist, however, as management sees improvements in activity in North America, the Middle East and Russia. As is typical of this seasoned management team, the company is optimally positioning itself to capture a large share of this upside, when it occurs, in order to deliver positive earnings contributions.

We continue to view Schlumberger as best in class in a still-beleaguered sector that continues to undergo a recovery. SLB's technological leadership, cost and cash discipline, industry expertise, free cash flow generation and pricing advantages will continue to support shares moving forward, although we remind subscribers that the stock will remain hostage to the direction of oil prices in the short term. On the call tomorrow, we will be listening for more details on the outlook for the recovery and how SLB plans to manage the timeline.

Conference Call: 8 a.m. ET Friday; 1-800-288-8967; password: Schlumberger Earnings Conference Call


Jim Cramer, Portfolio Manager & Jack Mohr, Director of Research
Action Alerts PLUS

DISCLOSURE: At the time of publication, Action Alerts PLUS was long SLB.

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