SocGen Concerned About Schlumberger: Downgrades On 'Lofty' Valuation

Societe Generale’s Edward Muztafago mentioned that share prices of oil services stocks, including Schlumberger Limited. SLB, “have soared in early 2016 on recovery hopes even as the trading environment has deteriorated further.”

Muztafago downgraded the rating on Schlumberger from Buy to Hold, while lowering the price target from $90 to $86.

Given the “lofty valuation,” the analyst believes that downside risk now significantly outweighs upside potential.

Recovery Prospects

Muztafago stated that prospects of recovery currently seem meaningfully in favor of a North American rebound over the coming 18 to 24 months, and that Schlumberger was “the least exposed of the Big 4 to this geo-market.”

“SLB has materially outperformed peers in the downturn, but it is not uncommon for shares to underperform as NAM leads a recovery,” the analyst cautioned, while adding, “Markets will likely need to get a bit further into the cycle before SLB shares can again outperform.”

Headwinds

With the oil services industry facing meaningful overcapacity, Muztafago believes that this capacity might not be reabsorbed before the U.S. sees significant production growth.

“For SLB and peers this inherent lack of pricing prospect suggests oil services valuations should have more limited upside than in more robust recoveries,” according to the Societe Generale report.

The EPS estimates for 2016, 2017 and 2018 have been lowered.