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Analysts, investors embrace Schlumberger's new technology-focused strategy

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Analysts, investors embrace Schlumberger's new technology-focused strategy

The biggest oilfield services company in the world has a new investment strategy to match its new chief executive, and investors seem to be pleased.

Challenged to attract customers and investors in a tough environment of low oil prices and strict capital discipline by producers, the new CEO of Schlumberger Ltd. Olivier Le Peuch is rolling out new ideas and products as the company reboots its investment plans.

The strategy, based on an asset-light model and fit-for-basin approach, is designed to improve margins in North American land and international markets, said Le Peuch, who took over as CEO on Aug. 1.

During a recent presentation at the Barclays CEO Energy-Power Conference, Le Peuch outlined plans to improve Schlumberger's international and North American land businesses through portfolio rationalization, investment discipline and continuous working-capital optimization. Le Peuch said the plan "will allow us to achieve a target of double-digit free cash flow margins" and eventually will "lead to returns above our cost of capital."

The strategy focuses on four key basins: North America land, offshore, the Middle East, and Russia and Central Asia, the CEO said. Each of these regions has a different set of resource plays or basins, and each faces different economic and operational drivers that translate into different activity levels and cycles. Le Peuch said the strategy used for the key regions could be replicated for all other regions and related basins.

The foundation of Schlumberger's new strategy is its modernized operating system and technology platform. Building on the foundation, the company will focus on digital leadership and a fit-for-basin approach that highlights technology, in-country value and market access.

Schlumberger is committed to digital investments and openness, which will be achieved by using its product DELFI cognitive E&P environment, Le Peuch said in a keynote address Sept. 19 at the 2019 SIS Global Forum in Monaco. He said the developer portal allows users to extend petrotechnical workflows and create differentiated solutions.

In the measurements space, Schlumberger introduced the Ora intelligent wireline formation testing platform that integrates new digital hardware with intelligent planning, advanced operations control and contextual insights to enable real-time decisions.

The new approach to its business through technology and strategic partnerships with companies including Chevron Corp. and Microsoft Corp. are improving the outlook for Schlumberger.

Schlumberger's new strategy was mostly well received by investors.

Morgan Stanley upgraded Schlumberger to overweight and kept the price target unchanged at $51 per share, based in part on the company's enhanced focus on returns under the leadership of Le Peuch.

Morgan Stanley analyst Connor Lynagh said in a Sept. 10 note that the new focus could drive growth in earnings and free cash flows even without higher oil prices or service price improvements.

"We think risk-reward for [Schlumberger] is the most compelling it has been in years," Lynagh wrote.

Shares of Schlumberger on the New York Stock Exchange closed Sept. 3 at $31.72 but reached $39.31 on Sept. 16 and closed Sept. 20 at $37.30.

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Schlumberger shares have declined about 70% from their 2014 peak, and the stock valuation versus the S&P 500 is at a 20-year low, offering a compelling entry point, according to Morgan Stanley.

While investors and a broad list of analysts applauded Schlumberger's new strategy, Tudor Pickering Holt & Co. analysts said the vision, which "entails an element of shrink-to-grow strategy," makes logical sense but it has not changed the long-term investment thesis.

The analysts said Schlumberger still faces heightened competition from its primary competitors as well as from "reinvigorated" local and regional competitors. Although Le Peuch said the company's dividend would remain at $2.00 per share, "we simply aren't inclined to jump on board the Schlumberger stock bandwagon, despite the admittedly palatable about 5% dividend yield," the firm said Sept. 20.