Schlumberger turns bearish on weak oil outlook

The stock of the world’s largest oilfield services company Schlumberger N.V. (NYSE: SLB) hit a 12-month low of $64.15 in the first week of July. It is obvious that the stock is affected by the poor outlook for crude oil.

Additionally, the stock was also impacted by the 44% decline in the first-quarter profit to $279 million. We forecast the bearishness in the stock to prevail in the short-term due to reasons provided below.

In the recent months, the rig count has increased considerably in the US, due to return of the shale players. However, Schlumberger, which has less exposure to shale resources will not be able to benefit from the return.

The company generated 76% and 80% of its revenues from non-US operations in 2015 and 2016, respectively. So, the prospects of gaining oilfield service contracts from shale players are lower.

Schlumberger Technology

The EIA (Energy Information Administration) has also issued a gloomy oil price outlook for 2017 and 2018. Furthermore, the production cut agreement between OPEC and other oil producing countries is also negative for companies such as Schlumberger.

Schlumberger’s cash flow from operations declined 46% to $656 million in the first-quarter of 2017. In Q1 2017, the free cash flow declined to $159 million, from $661 million in the year-ago quarter.

The stock of Schlumberger currently trades at a price to book ratio of 2.4x, while the industry average is 1.1x. Likewise, the price to sales ratio of Schlumberger is 3.5x, versus the industry’s average of 1.1x. On the basis of the details discussed above, Zacks investment research has downgraded the stock to “sell” rating, from the prior “hold” rating. Thus, considering the poor outlook for oil, relatively small exposure in shale oil fields, high debt, and decrease in free cash flow, we forecast a decline in the stock of Schlumberger.

The stock of Schlumberger is trading below the 50-day exponential moving average. Additionally, the green colored +DI line of the ADX indicator is below the red colored –DI line. Thus, we can expect the stock to remain in a declining orbit.

To capitalize on the downtrend, we are planning to pick up a low or below option offered by one of our dependable binary brokers. The investment would be made when the stock trades at about $67 in the NYSE. Additionally, we would choose a date around July 25th for the expiry of the option.

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