Jobs, wages, profits and dividends are all under siege for American oil companies. For years, Schlumberger (NYSE:SLB) stock was a stunner. That is, until mid-2014. Now, those glory days are long gone. Even when the price of oil powered its way up to $75 in October 2018, Schlumberger shareholders continued to suffer staggering losses.
Today, a barrel of WTI crude oil is nowhere near $75. Schlumberger’s dividend looks unsustainable. It’s a big company but that has no guarantee of profitability going forward. There’s more trouble ahead in all likelihood, and Schlumber stock gets a big fat “F” in my book.
When the Drilling Stops
As I’ve mentioned recently, oil-services companies that took on huge amounts of debt during boom years are now struggling. The oil price has been halved and in some cases this means drillers stop drilling and exploration activity grinds to a screeching halt.
Schlumberger’s generous forward dividend yield of 13.7% can’t persist in this austere oil-market environment. Dividend cuts are quite likely, and that would be a major turn-off for income-seeking investors. Losing shareholders would cause the share price to drop further, precipitating a vicious downward cycle.
Even if somehow the company bucked the trend and managed to maintain its current dividend yield, that wouldn’t provide much comfort if the share price dropped precipitously. Hapless long-term shareholders have already witnessed the Schlumberger stock price tumble from around $110 in 2014 to the $14 level in March of 2020.
The price-action trajectory is clearly to the downside. Fears stemming from the coronavirus from China, as I’ve previously explained, contribute to a downward spiral that reaches far beyond American oil fields:
“Much of the concern is how bad the productivity of Europe and the U.S. will be hit by Covid-19. And how much the consumer — the group that has kept the rally alive in the U.S. — fares after lost wages and in many cases, lost jobs … [Schlumberger’s dividend will be] cold comfort given the stock’s current performance and short-term prospects.”
How Low Can It Go?
Assessing the damage is challenging at this point in time. It is impossible to predict how low the oil price will go. There are a number of factors at work here. The two primary factors are completely out of Schlumberger’s control.
Things have gotten so bad that IHS Markit energy analyst Marshall Steeves had to concede that oil companies are in uncharted territory. “This is unlike anything we’ve experienced before,” stated Steeves.
Still, the analyst was able to distill the contributing factors down to two main problems. Specifically, Steeves cited “the steep decline in demand due to all the lockdowns including California now and with New Yorkers working from home and not traveling” along with Saudi Arabia being “set to flood the market at the same time that demand weakens.”
Steeves even went so far as to suggest that the price of a barrel of WTI crude oil could drop down to $10.65. The analyst didn’t go so far as to provide a timeline for this possibility, however. “Whether that happens depends on the duration and depth of the pandemic, which is something nobody knows and is unknowable,” Steeves explained.
There’s too much uncertainty, therefore, to recommend Schlumberger stock. One thing that is certain, though, is that the company’s cash flow isn’t positive. With a trailing 12-month earnings per share loss of $7.32, Schlumberger gets nothing but a “junk” rating from me.
The Final Word on Schlumberger Stock
To recommend Schlumberger stock would require a massive turnaround, not just in the company’s fortunes but in the global oil market. That’s not something that prospective investors can count on. In all likelihood, weakness will persist in the energy sector and especially in cash-flow-negative Schlumberger.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.