The energy sector is coming off a solid year, as sustained demand and constrained supplies fueled high oil and natural gas prices in 2022. This year, despite lingering concerns over economic uncertainty, continued demand-and-supply dynamics could likely drive energy prices higher.
Given the bright prospects of the energy industry, investing in fundamentally sound Geospace Technologies Corporation (GEOS) could be wise now for solid gains. On the other hand, investors should hold Schlumberger Limited (SLB) and wait for a better entry point in this energy stock.
According to the latest International Energy Agency (IEA) Oil Market Report (OMR), global oil demand is expected to grow by 2.2 million barrels per day (mb/d) in 2023 to reach a new record of 102.1 mb/d. Although macroeconomic headwinds, apparent in a deepening manufacturing slump, led IEA to revise its 2023 growth estimate lower for the first time this year by 220 kb/d.
China will account for 70% of global gains driven by surging petrochemical use. Moreover, in its latest medium-term market report, the IEA forecasts that global oil demand under current market and policy conditions will grow 6% from 2022 to reach 105.7 mb/d in 2028, buoyed by the petrochemical and aviation sectors.
“The shift to a clean energy economy is picking up pace, with a peak in global oil demand in sight before the end of this decade as electric vehicles, energy efficiency and other technologies advance,” IEA Executive Director Faith Birol said in a statement.
Furthermore, gasoline demand usually trends higher during the summer travel season from June to August.
Alongside sustained energy demand, supply cuts from top exporters Saudi Arabia and Russia would help to build a supportive environment for oil and gas prices this year. Saudi Arabia recently announced that it would extend a cut in oil production of 1 mb/d. The Saudis were joined by Russia, whose deputy prime minister Alexander Novak said Moscow would cut output by 500,000 barrels in August.
Last month, OPEC+ announced that it would stick to its 2023 oil production targets and limit combined oil output to 40.463 mb/d over January-December 2024. Earlier, the alliance agreed to a 2 mb/d output cut in October 2022. Also, in April 2023, some OPEC+ members announced voluntary cuts to their oil production of approximately 1.16 mb/d in a surprise move.
Goldman Sachs expects “all-time high” demand in oil markets to drive crude prices higher in the near term. The investment bank forecasts Brent crude to rise from just above $80 per barrel now to $86 per barrel by year-end. Higher oil and gas prices should benefit energy producers and businesses serving them.
Growing energy demand worldwide largely contributes to the rising oil and gas exploration activities. The global oil and gas drilling market is projected to reach $155.70 billion by 2027, growing at a 4.2% CAGR. Technological innovation and advancement would bolster the market’s growth.
Given this backdrop, investing in quality energy stock GEOS for potential gains could be wise now. However, investors could add SLB to their watchlist and wait for a better entry in this stock.
Let’s discuss the fundamentals of these stocks in detail.
Stock to Hold:
Schlumberger Limited (SLB)
SLB engages in the provision of technology for the energy industry globally. The company operates through four segments: Digital & Integration; Reservoir Performance; Well Construction; and Production Systems.
On July 6, SLB got awarded a five-year contract by Petrobras for enterprise-wide deployment of its Delfi™ digital platform. The contract scope covers Petrobras’ digital transformation from exploration, development, and production operations. This new contract for Petrobras’ digital transformation should boost SLB’s revenue streams and growth.
On February 3, SLB completed the acquisition of Gryrodata Incorporated, a global company specializing in gyroscopic wellbore positioning and survey technology. This transaction would incorporate Gyrodata’s wellbore placement and surveying technologies within SLB’s Well Construction business, bringing innovative drilling solutions for customers.
In terms of forward non-GAAP P/E, SLB is currently trading at 19.34x, 88.2% higher than the industry average of 10.28x. Also, the stock’s forward EV/EBITDA and Price/Cash Flow multiples of 11.45 and 13.80 are 103.5% and 196% higher than the industry averages of 5.63 and 4.66, respectively.
SLB’s trailing-12-month gross profit margin of 19.41% is 58.7% lower than the 49.59% industry average. Likewise, the stock’s trailing-12-month EBITDA margin of 21.57% is 42.5% higher than the 37.52% industry average.
For the second quarter that ended June 30, 2023, SLB’s revenue increased 19.6% year-over-year to $8.10 billion. Its pretax segment operating income was $1.58 billion, up 36.4% year-over-year. Its adjusted EBITDA grew 28.2% from the year-ago value to $1.96 billion. Also, Net income attributable to SLB and its EPS were $1.03 billion and $0.72, up 7.7% and 7.5% year-over-year, respectively.
Analysts expect SLB’s revenue to increase 11.5% year-over-year to $8.34 billion for the third quarter ending September 2023. The company’s EPS for the ongoing quarter is expected to grow 22.7% year-over-year to $0.77. Moreover, SLB surpassed the consensus EPS estimates in all four trailing quarters.
Over the past month, the stock has gained 21.6% and 62% over the past year to close the last trading session at $57.67.
SLB’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
SLB has an A grade for Momentum. Also, the stock has a C grade for Stability, Sentiment, and Quality. Within the Energy - Services industry, it is ranked #23 out of 46 stocks.
In addition to the above-mentioned POWR Ratings, one can access SLB’s additional ratings for Value and Growth here.
Stock to Buy:
Geospace Technologies Corporation (GEOS)
GEOS designs and manufactures instruments and equipment used in the oil and gas industry to acquire seismic data for locating, characterizing, and monitoring hydrocarbon-producing reservoirs. The company operates through Oil & Gas Markets; Adjacent Markets; and Emerging Markets segments.
On June 27, GEOS extended a rental contract with an international marine geophysical services provider who would rent the new product, Mariner®, shallow water seabed wireless seismic data acquisition nodes. Based on current contract terms, including potential options, the estimated value of the agreement is expected to reach $20 million.
“Having only launched the Mariner less than a year ago, we’re thrilled to see the rapid market adoption of our next generation shallow seabed node. We appreciate the validation of our advanced technology that this sizable rental contract from a valuable customer represents,” said Walter R. Wheeler, GEOS’ President and CEO.
On June 12, GEOS’ subsidiary, Aquana, LLC., announced the latest product in the Water IoT platform, a new remote shutoff value known as the Actuator Valve Serial (AVS). The Aquana AVS value is an IP68-rated remote disconnect ball valve that integrates with any existing Advanced Metering Infrastructure (AMI) platform. This new product launch should bode well for the company.
In terms of trailing-12-month EV/Sales, GEOS is currently trading at 0.76x, 58.9% lower than the industry average of 1.84x. Also, the stock’s trailing-12-month Price/Sales and Price/Book multiples of 0.76 and 0.85 compared to the respective industry averages of 1.84 and 1.66.
For the second quarter that ended March 31, 2023, GEOS’ total revenue increased 27% year-over-year to $31.37 million, and its gross profit came in at $12.95 million, up 90.2% year-over-year. The company’s income from operations was $4.38 million, compared to a loss from operations of $1.65 million in the prior year’s quarter.
Furthermore, GEOS’ net income stood at $4.64 million, or $0.35 per common share, compared to a loss of $1.47 million, or $0.11, during the previous year’s quarter.
Over the past three years, GEOS’ revenue grew at a CAGR of 4.6%. In addition, the company’s EBITDA increased at a 4.5% CAGR over the same time frame.
Shares of GEOS have gained 68.8% over the past six months and 100.8% year-to-date to close its last trading session at $8.07.
GEOS’ POWR Ratings reflect this robust outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
GEOS has an A grade for Momentum and B for Growth, Sentiment, and Quality. The stock is ranked #2 in the same industry.
Beyond what we stated above, we also have GEOS’ ratings for Stability and Value. Get all GEOS ratings here.
What To Do Next?
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SLB shares rose $0.13 (+0.23%) in premarket trading Thursday. Year-to-date, SLB has gained 8.97%, versus a 20.01% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
Which Energy Stock Should You Buy, Hold or Sell: Schlumberger (SLB) or Geospace Technologies (GEOS) StockNews.com
