New Threads Only:  Add to Google Reader or Homepage
New Threads & Replies:  Add to Google Reader or Homepage
Forums are for serious investors only. GuruFocus Forum Rules.

Forum List » Value Ideas and Strategies
Share and discuss value investing ideas and investing strategies.
New Topic Search
Goto Thread: PreviousNext
Goto: Forum ListMessage ListNew TopicSearchLog In
Schlumberger’s Competitive Advantage Will Drive Double-Digit Earnings Growth
Posted by: Sarfaraz A. Khan (IP Logged)
Date: December 2, 2013 02:21PM

The world’s leading oilfield services firm, Schlumberger (SLB), continues to grow in the international and North American markets. The company has managed to increase its market share and has, once again, beaten the market’s expectations in its quarterly results, for the eighth time in a row. Unlike some of its other rivals, Schlumberger is truly a global player with significant representation in the international markets. The company is now eyeing increasing demand from the Middle East and Asia, particularly Saudi Arabia and Iraq.

Strong Results


In its previous quarterly results, Schlumberger reported revenue growth of 10.6% from last year to $11.61 billion while its earnings rose 20% to $1.71 billion, or $1.29 per share. The business managed to beat both top and bottom line consensus estimates by $30 million and $0.05 per share, respectively. The strong results came on the back of an impressive performance in the Middle East and Asia region.

Schlumberger gets nearly 70% of its revenue from outside of North America, which is the largest portion in the industry. In the previous quarter, Schlumberger increased its revenues in the international market by 12%. A significant boost came from the Middle East and Asia where its revenues increased by an impressive 24.8% to $2.80 billion. Moreover, the company’s margins in the region increased by 330 basis points from last year. The acceleration in Middle East and Asia is largely because of wide variety of operations, projects in Saudi Arabia and Iraq, and better performance in the U.A.E. and Qatar. The company gets nearly 24% of its revenues from the Middle East and Asia.

Competitors

On other hand, based on recent quarterly results, Schlumberger’s leading rival Baker Hughes (BHI) gets almost half of its revenues from outside of North America and around 18% from the Middle East and Asia Pacific region while Halliburton (HAL) gets 48% of its revenues from international markets, including 16.7% from Middle East and Asia. Clearly, Schlumberger gets a considerably greater portion of its revenues from international markets in general and Middle East and Asia in particular.

In the previous quarter Halliburton missed the bottom line estimates while Baker Hughes, like Schlumberger, managed to deliver better results than the market’s expectations in terms of both revenues and earnings.

Competitive Advantage

The big three oilfield services companies have been feeling the impact of competition in the North American market, particularly in the pressure pumping business. The three have struggled to increase their profits at home. Moreover, the continuous weakness in the pricing environment in the U.S. has also made things difficult for oilfield services firms. However, give that Schlumberger gets most of its revenues from outside of North America, therefore the company has been in a much better position than its rivals. I believe this is Schlumberger’s biggest competitive advantage.

However, the significant exposure to the international markets, particularly in the developing countries, comes with its own share of risks. This recently became clear to Schlumberger that was forced to postpone its operations in Rumalia and Basra, Iraq, after fierce protests from its workers and locals. Baker Hughes had also suspended its operations in the troubled region.

However, Schlumberger has decades of experience of working in some of the most difficult places. The company can quickly adjust its operations to minimize the impact of the suspension. For instance, in the previous quarter, Schlumberger experienced delays in some regions, such as Algeria and Sub-Saharan Africa, but still managed to deliver an impressive performance in the international markets. As for Iraq, it has already resumed its operations.

Meanwhile, Schlumberger is eyeing significant growth opportunities in Saudi Arabia. The oil-rich kingdom and the home of the world’s largest oil firm Saudi Aramco, is expected to increase its oil and gas drilling activity. Saudi Arabia is currently working with 160 rigs and could increase this number to 210 within the next 13 months. This would translate into an increase in demand for oil and gas firms in general, and Schlumberger in particular, which has a solid track record of working in this country. During the conference call, Schlumberger’s management pointed that it is currently transferring its resources, including its workers and equipment, to Saudi Arabia, “to keep pace with the additional work that we are taking on.

Conclusion

Schlumberger believes that the international natural gas prices would remain stable in through 2014 while Brent crude prices could hover around $100 per barrel through 2014. Therefore, the current trends in exploration and production spending by oil companies, which drives Schlumberger’s demand, will likely continue through 2014. As discussed earlier, the company is eyeing significant growth in the Saudi Arabia, Iraq and the U.A.E. Besides the Middle East, Schlumberger is also expecting an increase in demand from Russia, Sub-Saharan Africa, China and Australia.

Schlumberger’s size and exposure to international markets has given it a competitive advantage that is unique in this industry. The company will continue to deliver double-digit EPS growth in the coming years on the back of its global dominance and technological capabilities.

Notes:

Schlumberger's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.


Stocks Discussed: SLB, HAL, BHI,
Rate this post:

Rating: 2.0/5 (1 vote)





Sorry, only registered users may post in this forum.

Please Login if you have an account or Create a Free Account if you don't
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide