Oil prices may have cooled from their highs of over $120 a barrel last summer. But oil and gas companies can still make a lot of money at $80 a barrel. This, in turn, has translated into continued demand – and profit – for companies that perform ground work related to the drilling and maintenance of oil wells.
Take the SLB service group oil. The company, formerly known as Schlumberger, earned more than $1 billion in net income in the final quarter of last year. That’s 77 percent more than a year ago.
Revenue, which rose 27 percent year over year to nearly $7.9 billion, was driven by profits in all of its geographic regions. Its pre-tax operating margin rose 393 basis points to 19.8 percent – the most since 2015, as SLB was able to raise prices for its services to its clients.
The risk, however, is that this is as good as it gets. Shares of SLB, which have risen 54 percent over the past 12 months, are now at their highest level since October 2018. Still, the stock trades at just 20 times forward earnings, below its three-year average of 24 times.
This looks cheap if SLB can continue to adjust its pricing power. There are reasons to believe it can. The International Energy Agency (IEA) forecasts that global oil demand will increase by 1.9 million barrels per day in 2023 despite fears of a global economic slowdown. Oil and gas supplies remain limited during the war in Ukraine. This will prompt oil producers to increase production and boost demand for drilling equipment and services.
To be sure, industry-wide cost cutting has left oil service workers with less equipment and less staff. Cost of revenue at SLB rose by more than a fifth during the quarter as the company paid more from labor to steel to sand. At the same time, cost-cutting due to the pandemic has left the industry with little spare capacity. As such, oil services groups like SLB look well placed to continue to pass on their higher operating costs to their clients.