In This Article:
SLB SLB is currently considered expensive on a relative basis, with the stock trading at a trailing 12-month enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA) of 7.57x, which is a premium compared with the broader industry average of 6.86x. Although a premium valuation indicates that the market has strong confidence in the company’s prospects, it necessitates scrutiny to determine if this higher price is warranted.
Image Source: Zacks Investment Research
International Market Weakness Poses a Hurdle for SLB
Baker Hughes BKR reported an international rig count of 905 for January this year, a notable decline from 965 rigs in the previous year's same month. This reduction indicates a broader trend where exploration and production companies are probably implementing cuts in their capital expenditure budgets for drilling activities. This shift is primarily due to increased pressure from shareholders, who are advocating for capital returns over further investments in exploration and production.
Image Source: Baker Hughes Company
Lower drilling activities could diminish demand for services from major oilfield service provider SLB in the international market, which contributes significantly to the company’s revenues.
The company also anticipates a downturn in North American upstream activity due to lower capital investments, enhanced drilling productivity and a sluggish rebound in natural gas markets.
Exposure to Russia Sparks Concerns for SLB
SLB faces significant headwinds in Russia, where revenues have dwindled to just 4% of the company’s global total in 2024 from 5% the prior year. This steep reduction underscores the severe impact of escalating geopolitical tensions and stringent sanctions. In response, SLB has been compelled to implement restrictive voluntary measures, including the cessation of product and technology shipments from its global facilities to Russia. As geopolitical complexities intensify and new U.S. sanctions come into effect, the company’s ability to operate in the region remains severely constrained, further jeopardizing its growth prospects in this critical market.
All these risk factors are reflected in SLB's price performance. Over the past year, the stock has lost 11.1% against the industry’s rally of 6.1%. SLB, however, outperformed the 24% decline of Halliburton Company HAL – another oilfield service giant.
One-Year Price Chart
Image Source: Zacks Investment Research
Lack of Organic Growth Raises Concerns for SLB
SLB’s expectation of flat revenues in 2025, excluding the ChampionX acquisition, highlights concerns about its ability to generate organic growth. While some international markets, such as the Middle East and Latin America, show resilience, these gains are offset by declines in key regions like Saudi Arabia, Mexico and offshore deepwater markets. Additionally, weakening North American oil and gas activity and pricing pressures could limit expansion. This stagnation raises questions about SLB’s ability to effectively leverage its diverse portfolio and technological advancements to drive sustainable revenue growth amid shifting industry dynamics.