SLB Ltd

SLB announced it is acquiring Kelvion, a global provider of data center thermal management and heat exchange technologies. It's paying roughly 11 times unadjusted 2026 EBITDA, or 8.5 times when baking in its anticipated synergy target by year three. The stock rose 5% during the trading day.

Why it matters: We strongly endorse this move. From a strategic standpoint, we think it meaningfully improves SLB's data center go-to-market solution, which has focused on modular construction equipment offsite but has no thermal management solution. Kelvion solves this hole in SLB's offering. SLB has prudently made some strategic bets in faster-growing businesses than its core, and perhaps none has grown more rapidly than its data center bet. But SLB has done so in a disciplined manner, as the multiple it's paying looks attractive. By our estimate, the transaction will create somewhere between $3.5 billion and $4 billion in shareholder value, assuming SLB executes on its synergy target. We model strong double-digit growth and think the combined data center business could reach over $1 billion by the late 2020s.

The bottom line: After incorporating the acquisition, we lift our fair value estimate for narrow-moat-rated SLB to $55 from $51. Of the raise, $3 came from the acquisition itself, while the remainder reflects the time value of money since our last update. We think SLB is acquiring Kelvion on attractive terms. We estimate Kelvion is growing faster than the data center thermal management industry given its liquid cooling exposure. Hyperscalers are rapidly adopting this technology to prevent AI chips from overheating as more computing capacity is packed into each data center rack. We fully credit SLB with the $120 million with the synergies it's anticipating, with over half coming from cost synergies from supply chain efficiencies, improved manufacturing processes, and other operating cost savings. But we think SLB's scale should help Kelvion sell into new markets too.

After incorporating the valuation impact from the acquisition of Kelvion, we lift our fair value estimate to $55 from $51. Of that increase, $3 came from the acquisition itself, while the remainder reflects the time value of money since our last update. We think SLB is acquiring Kelvion on attractive terms at only 11 times unadjusted 2026 EBITDA or 8.5 times when factoring in year-three synergies for a business that should grow its top line in the strong double digits.

ChampionX continues to grow on a pro forma basis, and management remains on track to achieve its synergies target of $400 million annualized on a pretax basis. Digital adoption continues to be strong, which we like as SLB's digital suite carries inherently high incremental margins. Further, we think the data center market could quadruple by the end of the decade from last year. Upstream project spending in underdeveloped deepwater basins should also drive core growth. Overall, we expect SLB to increase revenue at a 4% five-year CAGR.

SLB holds an oligopolistic position in some of the most attractive market segments, thanks to its record of innovation. SLB specifically holds an industry-leading position in digital, whose revenue is sticky, highly accretive to margins, and decoupled from cyclical headwinds. Digital enjoys these attributes because it helps reduce customers’ cycle times and lowers their production costs. We expect SLB's advanced digital solutions to grow meaningfully over the remainder of the decade. Our revenue assumptions are that digital can hit a low-double-digit CAGR through 2030 while meeting the rule of 40 (a principle that states a software company’s combined revenue growth and profit margin should equal or exceed 40%). That revenue is accompanied by incremental margins at a premium to SLB’s core business (where we expect the long-term entitlement will total roughly 30% to 35%).

Additionally, we estimate over 40% of SLB's business is exposed to offshore projects. Rystad Energy estimates that more than $150 billion in new offshore investment is expected in 2026. SLB is well-positioned to benefit once these projects receive the go-ahead. We also believe global final investment decisions (or sanctioned projects) will continue to exceed $100 billion annually beyond our explicit forecast. The Middle East and deepwater projects in Latin America and West Africa strike us as among the most attractive long-term opportunities, and we think SLB will capture its healthy share of project wins, particularly in infrastructure-led exploration, which leverages existing infrastructure in mature basins to extract additional hydrocarbons. Deepwater projects are more resilient to commodity pressures due to lower breakeven costs. We estimate that deepwater projects have far higher revenue intensity per rig than other opportunities.

We assign SLB a narrow economic moat rating. We base our assessment primarily on intangible assets and cost advantage. We also observe evidence of switching costs in SLB’s digital segment. SLB’s annual heavy research and development investment vastly outpaces that of competitors. Heavy R&D investment allows SLB to command pricing power for certain solutions. SLB’s pricing power is a byproduct of multiple factors, including the firm’s intellectual property, engineering prowess, a decadeslong record of performance, and, to a lesser extent, its relationships.

Switching Costs Confer Digital With Narrow Moat

SLB’s digital solutions primarily center on the Delfi digital platform. Delfi is SLB’s software-as-a-service in-house solution focused on drilling and well construction analytics, from the initial design process to execution of the wellsite.

Delfi pulls from an E&P data lake that collates multiple data points that SLB has collected in a centralized location, including seismic surveys, well data, and global production records. The platform also allows customers to upload their own intellectual property and workflows in a manner that secures their data while facilitating collaboration.

Delfi boasts a 95% gross retention ratio, according to management figures from late 2022, which suggests a customer lifetime of roughly 20 years. We think a better-than-median retention ratio relative to other software firms in our coverage represents direct evidence of switching costs.

We also believe digital solutions like Delfi serve several mission-critical functions. Simulation studies done through Delfi can significantly reduce the time it would otherwise take to conduct such a study on premises, all while delivering approaches that vastly improve the rate of recovered hydrocarbons.

SLB’s Reservoir Performance Merits a Narrow Moat

A majority of SLB’s offerings in reservoir performance broadly relate to wireline services, along with fracking and other testing solutions. While small portions of the business, such as pressure pumping, don’t have a moat, wireline reservoir technology does.

Wireline reservoir technology collects real-time data that provides upstream customers with multiple data points, including reservoir depth and location of hydrocarbons. During the fracking stage, wireline also serves as a conveyance system to move perforating guns and other tools into a well, which are then used to work that well.

SLB has some unique tools that should still add incremental value for customers and generate good returns on capital, despite a reduced emphasis on exploration spending. Of these, the one that seems strongest to us is Ora, SLB’s intelligent wireline formation testing platform.

Ora strikes us as a differentiated, proprietary solution because it eliminates the need for flaring and vastly reduces carbon emissions. This is due to its extensive real-time testing capabilities that overcome conditions posed by some of the most difficult formations. Ora is more effective in measuring variables like pressure, flow, and fluid properties that are traditionally measured by flaring in the oil and gas industry. It also solves a critical concern for E&P customers that are attempting to reduce their carbon footprint.

Well Construction Garners Narrow Moat

Well construction benefits from intangible assets and cost advantage. It mostly sells various drilling solutions related to building a well. Of these, the highest source of SLB’s revenue comes from directional drilling services related to offshore wells, as well as horizontal land wells in North America.

SLB holds a strong competitive position in directional drilling, boasting a leading share more than double its closest peers. A primary basis of well construction’s moat in directional drilling is the ability of rotary steering technology to lower customers’ cost of drilling relative to other commoditized substitutes.

SLB reaps the benefits of customers’ improved economics through premium pricing. The benefits customers derive from this solution include improvements in rates of penetration and less below rotary time or time spent where the drill string is not actively rotating and drilling.

Strong customer benefits have allowed SLB to remain the market leader in rotary steering technology for more than 20 years. SLB has been the leader because of its ability to transfer its learning from technologies in its reservoir performance segment to design technologies like rotary steering in its well construction segment. It’s been able to cement that advantage through increasingly integrating automation and artificial intelligence. Its equipment now touches more than one-third of all rigs deployed in the US.

Production Systems Warrants a Narrow Moat

SLB’s production systems segment also benefits from intangible assets and cost advantage, though quantitatively, we think it’s on the slimmer side of narrow. We also think SLB’s competitive position in certain product lines is less strong than in other portions of its business.

SLB’s largest product lines in production systems include subsea equipment, followed by artificial lift and completion equipment and services. SLB lags TechnipFMC in subsea equipment, but it meaningfully leads in its share of the artificial lift market and trails only Halliburton in completion equipment and services. These are used just before starting a well. Despite the higher capital cost in building the production systems business through acquisitions relative to other portions of SLB, we still think there’s sufficient evidence to expect cumulative excess returns over the next decade.

SLB commands over one fourth of the artificial lift market when including ChampionX. Within artificial lift, SLB produces highly engineered equipment, such as electrical submersible pumps, which are preferred by the international markets it predominantly caters to. ESP installation is complex and must be adapted to specific and frequently harsh operating environments.

SLB should benefit from a sanctioned project pipeline of $100 billion per year and should win a growing set of global offshore projects.

SLB holds a leading position in digital in oilfield services, so it should disproportionately benefit from this secular trend, which is still in its early stages.

The market underappreciates SLB’s Venezuelan opportunity, including a potential multi-billion windfall that could benefit SLB for many years.

The market is overly concerned about the impact of shut-in production due to the Middle East conflict.

Saudi rig activity is at a multiyear low, and SLB is overly exposed there.

SLB significantly overpaid for ChampionX. Worse still, it used undervalued stock to finance the acquisition and won't hit its vague revenue synergy target of roughly $100 million.