Goldman Sachs reaffirmed its Conviction Buy rating on Schlumberger Limited (NYSE:SLB) with a steady price target of $52.00. The firm's analyst cited the stock's recent underperformance as an opportunity, noting that Schlumberger is poised to generate robust free cash flow and return capital to shareholders. Despite lowering EBITDA estimates for 2025 and 2026 by 7% and 9% respectively, the analyst believes the market has overreacted, pricing in an overly pessimistic scenario.
The analyst pointed out that the stock's decline over the past three months largely stemmed from investor concerns over potential negative estimate revisions. However, with the company's 2025 guidance now factored in, along with adjusted Street expectations, the analyst views this as a clearing event for Schlumberger's shares. The firm's outlook suggests a healthier performance than what is currently reflected in the stock's price, with a forecast of 2% year-over-year revenue growth in 2025 and expectations for low single-digit growth in subsequent years.
The analysis underscored the importance of free cash flow generation for Schlumberger, especially given the current industry cycle where upstream capital expenditures are anticipated to increase modestly. The firm estimates that Schlumberger will generate $4.6 billion in free cash flow in 2025, with $3.6 billion expected to be returned to shareholders. This would represent an approximately 8% free cash flow yield and a total capital return of about 6%. While the payout ratio is estimated at 80-85%, the analyst considers a 60% ratio to be reasonable over the long term.
In conclusion, Goldman Sachs reiterated its buy rating on Schlumberger, seeing a 24% upside to their $52 price target. The firm's position reflects confidence in Schlumberger's future financial performance and its ability to deliver value to its shareholders despite recent market skepticism.
SLB delivered a steady financial performance in its third-quarter earnings report, maintaining revenues at $9.2 billion and achieving a high adjusted EBITDA margin of 25.6%. The Digital & Integration division saw a significant revenue increase, driven by digital sales, while the Production Systems revenue also grew. However, Well Construction revenue declined due to lower rig counts.
Despite these developments, SLB remains committed to returning at least $4 billion to shareholders in 2025. Barclays adjusted its price target for SLB, reducing it to $61 from the previous $63, while reaffirming its Overweight rating on the stock. The revision follows SLB's plans to divest its Palliser APS project in Canada and a slowdown in customer activity due to declining oil prices and broader economic challenges. These are some of the recent developments at SLB.
InvestingPro Insights
Complementing Goldman Sachs' bullish stance on Schlumberger Limited (NYSE:SLB), recent data from InvestingPro provides additional context to the company's financial health and market position. SLB's P/E ratio of 13.48 suggests that the stock may be undervalued relative to its earnings, aligning with Goldman's view that the market has overreacted to recent concerns.
InvestingPro Tips highlight SLB's strong financial foundation. The company has maintained dividend payments for an impressive 54 consecutive years, demonstrating a commitment to shareholder returns that supports Goldman's projection of substantial capital returns. Additionally, SLB operates with a moderate level of debt and has liquid assets exceeding short-term obligations, indicating financial stability.
The company's revenue growth of 12.4% over the last twelve months and an EBITDA growth of 15.76% in the same period underscore its operational strength. These figures support Goldman's outlook on SLB's ability to generate robust free cash flow.
For investors seeking a deeper analysis, InvestingPro offers 10 additional tips on SLB, providing a comprehensive view of the company's prospects and potential risks.
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