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Let's Talk About Schlumberger
Posted by: David Kerr (IP Logged)
Date: November 23, 2013 11:29PM
Schlumberger (SLB) is the world’s largest oilfield services company. It’s a massive supplier of information solutions, integrated project management, and technology to the oil and gas exploration and production industries worldwide. The company operates in three different groups: Reservoir Characterization, Drilling, and Production.
The company’s Reservoir Characterization group deals with technologies involved in finding and defining hydrocarbon deposits. This group provides reservoir imaging, monitoring, and developmental services, exploration and production pressure and flow-rate measurement services, and a whole bunch of information solutions and IT infrastructure services that support oil and gas industries.
Schlumberger’s Drilling group basically consists of the predominating technologies involved in the drilling and positioning of oil and gas wells. This group designs, manufactures, and markets drilling bits and systems, offers geo services, and supplies engineering support.
The Production group holds the main technologies involved in the lifetime production of oil and gas reservoirs and consists of many various production projects. This group provides well services such as pressure pumping, well cementing, stimulation, and intervention. It also consists of well completion services and equipment, and other services such as coiled tubing equipment and geological storage solutions.
For 2012, the Reservoir Characterization Group accounted for 27% of revenue, the Drilling Group did 38%, and the Production Group did 35%.
The company used to report a Distribution segment as a stand-alone business that generated $2.6 billion in revenue in 2011, but sold the business to National Oilwell Varco (NOV) for $800 million in 2012.
Schlumberger is huge on international operations, with only roughly 29% of it’s share price attributable to North American operations. International margins rose in 2012 by 2.3%.
The first thing I want to mention is Schlumberger’s dividends. Over the last ten years, the company has pretty much kept dividends in-line with the company’s growth, with the most recent increase of 14% in January of 2013.
The company has also had impressively stable revenue growth, with a 10-year average growth of 15.2%.
Schlumberger doesn’t necessarily have a hoard of cash, but the company’s assets remarkably outweigh its liabilities. SLB currently has over $65 billion in total assets and only $27 billion in total liabilities. Schlumberger also has over twice as much in current assets than current liabilities, even though it only holds about $3 billion in cash.
Here is the company’s selected financials in the most recent 10-K:
Schlumberger currently holds a 19.05% Operating Margin and a 14.29% Net Profit Margin.
Advanced technology will probably become more important as existing oilfields mature and new oilfields are developing in harsh environments and challenging geological conditions. Not only that, but most major new oilfield developments will most likely be found somewhere in the Eastern Hemisphere due to lower funding and development (F&D) costs, as well as higher growth potential. This is great for Schlumberger, who has roughly 55% of its share price attributed to operations in the Eastern Hemisphere.
The company definitely has a competitive advantage at the moment, but who knows how long it will last. Schlumberger currently has a dominant position in the reservoir description business. This business consists of methods such as seismic imaging and subsurface analysis, and all of the major oil players are foaming at the mouth over it. Companies like BP (BP) and Royal Dutch Shell (RDS.B) rely on these services to make sure they hit oil and gas every time they venture out into more risky drilling environments.
Using GuruFocus.com’s DCF Calculator, the current intrinsic value of the company is displayed at $115.87 per share. That’s a 20% margin of safety. Is that enough? It is widely accepted that a 30% margin of safety should be a minimum requirement for a long term investment. Let’s take a look at the Reverse DCF Calculator. This shows us the growth rate of free cash flow (FCF) that a company needs to have in order to justify its current stock price. Using the Reverse DCF Calculator, we see that Schlumberger needs to have at least a 16.63% growth rate, which it does.
It will be interesting to see how long Schlumberger can hold this competitive advantage. I don’t necessarily think the company is incredibly undervalued at the moment, but it is definitely a strong, long lasting, generational company in a growing industry. What are your thoughts?
Disclosure: No current position held at the time of writing.
Disclaimer: The opinions and ideas in this article are for informational and educational purposes only. They are not a recommendation to buy or sell any stock at any given time. As always, it is imperative for each individual investor to do their own due diligence and perform their own research on any and all stocks before making an investment decision.
Stocks Discussed: SLB, NOV, BP, RDS.B,