SLB drills down to a trend-following signal for income investors

Key Points

• SLB had a solid quarter, outperforming estimates and guiding for another year of strong growth. 
• Analysts are driving this market higher and see it trading at least 30% below value. 
• The technical picture includes a trend-following signal that could take this market to a five-year high. 

The price action in SLB NYSE: SLB entered a correction last fall, but it has ended. Within a sustained uptrend, the correction has drilled to critical levels and rebounded after the Q4 earnings release. The release was better than expected, confirming the global oil-field supercycle is in place. That supercycle is driven by investment in technology, efficiency and expansion supported by growing demand and a decade of underinvestment by oil and gas companies.

What is a trend-following signal? To begin, a trend in stock prices is a measurable, directional movement in price punctuated by periodic rallies and sell-offs. In a downtrend, the sell-offs are greater than the rallies and in an uptrend, the reverse. 

In this case, SLB stock is in an uptrend and on the cusp of firing a strong trend following signal. The signal in SLB  is marked by price action and indicators such as MACD and stochastic. The price action shows support at the critical level supported by divergences in the indicators. Divergences often highlight market turning points and are most reliable in such situations.

SLB has a solid quarter; margins widen

SLB had a solid quarter with a strong performance in all segments and geos. The international market led with an 18% expansion supported by strength in the Middle East, Brazil, Africa and the Mediterranean, which is expected to persist in 2024. North America was flat sequential and YOY and expected to hold steady as the focus shifted to the offshore markets.  

Segmentally, all segments produced growth, but Production Systems and Reservoir Performance were strongest at 33% and 12% each. Production Systems, Reservoir Performance and Well Construction all accelerated while Digital declined. 

Digital is an interesting segment of the company as it encompasses new technology and digitization of oilfield operations. It is centered on the Delfi platform. The platform integrates oilfield operations in the cloud and is adaptable, scalable and aided by AI. Among the AI advances made by Schlumberger is a collaboration with Geminus AI to fuse AI with 3-D physics simulation data to provide real-time assessments in numerous applications. 

Revenue gains led to margin expansion. The GAAP margins contracted due to one-offs and non-cash impairments, while adjusted margins expanded about 100 basis points to leverage the bottom line. The adjusted net income rose 21% to $0.86 per share, edging out the Marketbeat.com consensus by $0.03 or 3.6%, and the outlook is solid. The company expects another year of strong growth led by the international markets and investments in new technology and efficiency. 

SLB pumps out capital returns, balance sheet improvement, and equity

SLB produced cash flow in the quarter at $3.02 and $2.28 billion in FCF. That’s an FCF margin of 25%, and it is being used for shareholder benefit. The company built its cash position, receivables, inventory and assets over the year with only a mild increase in debt. The net result is a decline in leverage, and equity is up 18% for the year, providing a significant tailwind for the stock. The stock trades at only 13.5X this year’s earnings estimates, suggesting a solid price/multiple expansion could occur at any time. 

Capital returns are safe. After raising it this quarter, the company pays a dividend worth just over 2%, with shares near the six-month low. The payout ratio is low, below 35%, suggesting the 10% distribution increase is sustainable and will be repeated next year. The dividend is compounded by share repurchases, which increase the effective return by about 30%.

The technical outlook: SLB is in for a robust rebound

Among the factors suggesting SLB is in for a robust rebound are the analysts' sentiment and consensus price target. Both are trending higher, with the sentiment up to Buy from Moderate Buy and the average target up 27%. More importantly, the low end of the range of $62 is well above the current price action, suggesting at least a 30% upside for the market. Those targets align with the technical signals, which indicate the recent highs near $62 could be retested soon, and new highs should be expected.