Should Investors Buy, Sell, or Hold SLB Stock Before Q3 Earnings?

SLB SLB is set to report third-quarter 2024 results on Friday, before the opening bell.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

The Zacks Consensus Estimate for third-quarter earnings is pegged at 88 cents per share, implying growth of 12.8% from the year-ago reported number. The estimate was revised downward by three analysts in the past seven days against zero upward movements. The Zacks Consensus Estimate for third-quarter revenues is currently pegged at $9.3 billion, indicating an 11.7% uptick from the year-ago actuals.

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SLB beat the consensus estimate for earnings in each of the trailing four quarters, with the average surprise being 1.9%. This is depicted in the graph below:  

Q3 Earnings Whispers for SLB Stock

Our proven model does not conclusively predict an earnings beat for SLB this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold) increases the chances of an earnings beat. That is not the case here.

The company has an Earnings ESP of -1.11%. This is because the Most Accurate Estimate currently stands at 88 cents per share, lower than the Zacks Consensus Estimate of 89 cents. SLB currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank stocks here.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Factors to Note

According to the U.S. Energy Information Administration, the average spot prices for West Texas Intermediate crude at Cushing, OK, were $81.80 per barrel in July, $76.68 per barrel in August and $70.24 per barrel in September. This indicates that the crude pricing environment in the third quarter was highly favorable for exploration and production activities. Despite this favorable pricing, drilling activities declined in the international market, where SLB usually generates most of its revenues.

Baker Hughes Company BKR stated in its quarterly rig report that the number of rigs operating in the international market during the September quarter was 937, down from 963 in the second quarter.

Image Source: Baker Hughes Company

The decrease in drilling activities in international markets suggests that explorers and producers likely spent less on upstream activities. Lower customer spending is likely to have affected the demand for services provided by the leading oilfield service provider SLB. The Zacks Consensus Estimate for the company’s operating earnings before tax from the Well Construction business is pegged at $743.7 million, lower than $759 million in the year-ago quarter. Notably, the Well Construction business unit, which focuses on maximizing drilling efficiency and optimizing well placement and performance, is the major revenue contributor among all the business segments.

SLB’s Stock Price Performance & Valuation

SLB's stock has exhibited a downward movement in the year-to-date period.  The stock has lost 16.4% compared with the industry’s decline of 1.7% in the same time frame. Halliburton Company HAL, another leading player in the oilfield service space, slipped 17.9% over the same time frame.

YTD Stock Price Performance

Image Source: Zacks Investment Research

Despite the recent price decline, SLB still appears relatively overvalued, indicating the potential for further price decreases. The company's current trailing 12-month Enterprise Value/Earnings Before Interest, Tax, Depreciation and Amortization (EV/EBITDA) ratio is 8.29, which is trading at a premium compared to the broader industry average of 7.11.

Image Source: Zacks Investment Research

Investment Evalutation for SLB Stock

The underperformance of the stock price compared with the industry is a clear reflection of the company-specific risk. Huge dependence on the international market is posing a significant threat to the company’s operations. This is because exposures in the Middle Eastern markets introduce significant geopolitical and operational risks to its operations.

A slowdown in drilling activity, as upstream companies focus more on delivering stockholder returns rather than expanding production, is reducing demand for SLB’s services. Additionally, SLB’s future growth heavily depends on its customers’ capital expenditures, which tend to decline during economic downturns, presenting a potential risk to its revenue growth.

Last Word

SLB's overall business is expected to remain bearish due to a moderation in drilling activity among upstream companies globally. This reduction in capital expenditures by SLB's customers has likely dampened demand for its products and services throughout the third quarter, with indications that this trend will persist. Consequently, given its current overvaluation, it would be prudent to avoid this stock at the moment.

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