Citi has adjusted its outlook on SLB (NYSE: SLB), reducing the price target from $60.00 to $54.00, while still endorsing the stock with a Buy rating.
The firm cites a deceleration in upstream spending growth as a key factor for the adjustment. According to the analyst, SLB's fourth-quarter EBITDA is now projected at $2.36 billion, a 1.5% decrease from previous estimates, which could reach $2.42 billion when including other income. This revision takes into account a slight drop in revenue as well as lower costs.
Looking further ahead, Citi has revised its 2025 EBITDA forecast for SLB down by 5% to $9.99 billion, or $10.21 billion with other income. This reduction is attributed approximately equally to anticipated lower revenue and the impact of the Palliser sale.
The analyst notes that slowing revenue growth internationally has been a significant challenge for SLB's stock, and the forecast for international growth in 2025 has been scaled back to 2% from an earlier expectation of around 4.5%.
Despite these headwinds, SLB's digital business is expected to contribute to growth, even if upstream spending plateaus. The analyst suggests that a key aspect of SLB's investment appeal may shift towards free cash flow (FCF). With the Palliser divestment leading to capital expenditure (capex) savings, which should balance out the capex from CHX, overall capex in 2025 is anticipated to remain roughly stable at about $2.6 billion.
In terms of FCF, Citi projects that SLB will generate $5.85 billion next year, which translates to an attractive yield of approximately 9%. This forecast is supported by expectations of moderating working capital growth, coupled with the aforementioned capex savings.
In other recent news, Schlumberger Limited (NYSE:SLB) reported steady financial performance in its third-quarter earnings, with revenues of $9.2 billion and an adjusted EBITDA margin of 25.6%. The company's Digital & Integration division saw an increase in revenue, driven by digital sales, while the Production Systems revenue also grew, even as Well Construction revenue declined due to lower rig counts.
Despite a more cautious spending environment in the oil sector, SLB has demonstrated a commitment to returning capital to shareholders, with the company repurchasing over $500 million worth of shares in the third quarter.
Analysts from Raymond James, Goldman Sachs (NYSE:GS), and Barclays (LON:BARC) have provided their insights on SLB's performance. Raymond James maintained an Outperform rating for SLB, despite reducing its price target to $57.
Goldman Sachs reaffirmed its Conviction Buy rating on SLB with a steady price target of $52, citing the stock's recent underperformance as an opportunity for robust free cash flow generation and capital return. Barclays, on the other hand, adjusted its price target for SLB to $61 from the previous $63, while reaffirming its Overweight rating on the stock.
InvestingPro Insights
SLB's financial metrics and market performance offer additional context to Citi's analysis. According to InvestingPro data, SLB's revenue growth stands at 12.4% for the last twelve months, with a quarterly growth of 10.22% in Q3 2024. This aligns with Citi's observations about decelerating upstream spending growth, yet still indicates positive momentum.
The company's P/E ratio of 13.48 and adjusted P/E of 12.43 suggest a relatively modest valuation, which could be attractive given the company's profitability and growth prospects. An InvestingPro Tip highlights that SLB has maintained dividend payments for 54 consecutive years, demonstrating a strong commitment to shareholder returns. This is particularly relevant in light of Citi's emphasis on SLB's free cash flow potential.
Another InvestingPro Tip notes that SLB operates with a moderate level of debt, which could provide financial flexibility as the company navigates the changing landscape of upstream spending. For investors seeking more comprehensive analysis, InvestingPro offers 8 additional tips for SLB, providing a deeper understanding of the company's financial health and market position.
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