HAL and SLB are my favorites and largest services positions, here's a TPH note on SLB from this morning below. Also have TOLWF (Trican) and EEYUF (Essential Energy). Trican is breaking out of beautiful 5 year bottoming pattern this morning as we speak.
SLB Q1’22 Update
Recent underperformance is well overdone, stock now our large-cap OFS favorite through year-end
Sector: Energy Services & Equipment | Ticker: SLB | Recommendation: BUY | Target: NA | Close: $41.69 | Market Cap: $59B | Analyst: Taylor Zurcher
While we had already updated our SLB model a few weeks ago to reflect the company’s recent Q1 guide-down, we’ve now made some incremental tweaks to account for the company’s subsequently announced plan to suspend all new investment and technology deployment in Russia (~5% of revenue mix). In a nutshell, this is likely to result in a slower seasonal ramp Q2+, but we’re still modeling very healthy back-end weighted growth (with strong incrementals) as int’l activity momentum outside of Russia continues to accelerate, and we also still see the business exiting 2022 at a very similar margin trajectory (EBITDA margins +200bps y/y). Due to the lower 1H’22 starting point, we have now reduced our FY’22 EPS estimate to $1.81 (vs. prior $1.91; Street $1.91) but our FY’23 numbers remain largely intact (EPS now $2.57 vs. prior $2.60; Street $2.60). From a stock perspective, SLB started red-hot out of the gate in January but has since been a notable laggard (vs. 1/31: SLB +7% vs. BKR +33% / HAL +26% / OSX +27%) as, among other things, the market has digested SLB’s revised Q1 outlook and planned de-emphasis of its Russia operations. We believe this underperformance is well overdone for a few key reasons. First, the supply-chain headwinds that have popped up during Q1 are not unique to SLB but rather issues all globally-diverse OFS companies are facing (including SLB’s two largest peers). Second, while Russia will take a dent out of near-term earnings, we see limited long-term earnings impact as what’s lost in Russia is likely to be more than made up for by stronger customer spending levels in many other key areas around the globe. Third, we continue to see the company reaching its 2.0x net leverage target by mid-2022 and see no change to the company’s double-digit FCF margin targets over the next couple of years, with the stock currently screening favorably on both a FCF/shr and P/FCF basis vs. its two closest peers. On combination of all the above, we fully expect SLB to begin recouping some of its recent relative underperformance in the months ahead, and we’d now point to SLB as our top large-cap OFS stock pick through year-end.