Schlumberger (SLB, Financial) is one of the largest oil services companies with presence across 80 countries. It offers a set of oil services — from seismic surveys to artificial lifting — to oil majors, exploration and production companies, and national oil companies
The services are typically used to extract oil and gas from wells. This activity has become more complicated with more complex and deeper oil and gas reservoirs under development.
The company's portfolio enables Schlumberger to wrap up its products into a single offering that many competitors cannot imitate. Indeed, the firm is a leader in all its product lines. Furthermore, it carries out research and development, which jointly with a technology approach have allowed the company to build a solid economic moat.
Its substantial R&D investments are backed by a clever acquisition strategy. The success in R&D means the company can negotiate payoffs.
What makes the company unique in its industry is the ability to think like a technology firm that acquires soft assets rather than a consumer goods company, like many of its peers do.
There are eight reasons why Schlumberger is worth analyzing:
1. Schlumberger has a five year projected PEG of under 0.9, which is a 45% discount to its five-year average.
2. Insiders are buyers since the current market downturn. They started to accumulate shares since August.
3. It is rapidly growing earnings. It made $2.86 a share in 2010, it is projected to make $3.67 a share in 2011, and it is expected to make $4.95 a share in 2012.
4. SLB also has impressive revenue growth. It is projected to grow revenues north of 40% this year and over 15% in 2012.
5. Iraq is going to be core part of SLB’s growth going into 2012 as it has the capacity to double its production over time, and Schlumberger has entered into three key contracts.
6. SLB is financially sound, and it will grow its EPS at a 30% annually over the next three years.
7. The reopening of the Gulf of Mexico after the BP disaster should help with revenues.
8. It is selling under analysts’ price targets. The median analysts’ price target on SLB is $94, and Credit Suisse has a price target of $99 on Schlumberger.
Unfortunately, Schlumberger may also face some risks as it competes in global markets. One of the risks is related to politics. It is widely known that governments can destroy firms to obtain political gain or nationalize assets.
Furthermore, the company may also suffer from the deep fall of oil and gas prices. Its reliance on technology and acquisitions to increase revenues may be affected by a competitor developing better technology or the failure to meet expectations.
Last quarter results
Pretax operating income for Oilfield Services was $1.93 billion, which represents a $182 million sequential increase. Oilfield Services pretax operating income margin improved 77 basis points to 20.2%.
Schlumberger is financially healthy thanks to the strong free cash flow it has generated for years.
At the end of 2011, Schlumberger's debt/capital ratio is expected to be 25%, its EBITDA to be about 37 times its interest expense, and its total debt/EBITDA ratio to be 1.15 times.
Fortunately, the company has been able to avoid large debt burdens.
“The current financial turmoil has already resulted in a lower outlook for oil demand growth in 2012, although demand growth is still expected to exceed that of 2011. However, recent production data, as well as forward projections, indicate that there is a tight cushion of excess oil supply that will continue to support activity. Therefore, while the financial turmoil introduces some uncertainty over near-term activity, it has yet to have an impact on the actual activity of our customers,” says Paal Kibsgaard, the company's CEO.
Valuation
My fair value estimate is $94 per share, which implies a forward 2012 P/E multiple of 18 times and a forward 2012 EV/EBITDA multiple of 10 times. I think those multiples are appropriate for a firm that is a leader in its field, has a super-strong balance sheet and offers consistent earnings growth.
SLB is undervalued when I compare the current P/S, P/S and P/B valuation multiples to how the valuation was in the past 10 years. Schlumberger is trading in the low end of its valuation range.
In terms of international markets, Brazil, Mexico, Iraq and Russia are offering growth opportunities for the years to come.
Many of Schlumberger's markets can grow 10% annually with the complexity of the oil and gas reservoirs requiring more services to fully develop.
The firm's long-term operating margin in North America is expected to be around 23% just like the expectations in international markets, which will gradually recover from the last downturn.
Schlumberger's capital expenditures in 2011 and 2012 are forecast in $4.4 billion and $4.6 billion.
I like the fact that the new CEO, Paal Kibsgaard, leads one of the deepest and strongest management teams in the oil services industry.
The company's financial statements are very good and provide much insight into the business and industry.
During the former CEO's tenure, capital allocation was superb, and the firm made many useful technology-related acquisitions to maintain its R&D edge over its peers.
The company's return on invested capital has consistently been well ahead of its cost of capital over the years, and that dynamic is not expected to change in the near future.
The services are typically used to extract oil and gas from wells. This activity has become more complicated with more complex and deeper oil and gas reservoirs under development.
The company's portfolio enables Schlumberger to wrap up its products into a single offering that many competitors cannot imitate. Indeed, the firm is a leader in all its product lines. Furthermore, it carries out research and development, which jointly with a technology approach have allowed the company to build a solid economic moat.
Its substantial R&D investments are backed by a clever acquisition strategy. The success in R&D means the company can negotiate payoffs.
What makes the company unique in its industry is the ability to think like a technology firm that acquires soft assets rather than a consumer goods company, like many of its peers do.
There are eight reasons why Schlumberger is worth analyzing:
1. Schlumberger has a five year projected PEG of under 0.9, which is a 45% discount to its five-year average.
2. Insiders are buyers since the current market downturn. They started to accumulate shares since August.
3. It is rapidly growing earnings. It made $2.86 a share in 2010, it is projected to make $3.67 a share in 2011, and it is expected to make $4.95 a share in 2012.
4. SLB also has impressive revenue growth. It is projected to grow revenues north of 40% this year and over 15% in 2012.
5. Iraq is going to be core part of SLB’s growth going into 2012 as it has the capacity to double its production over time, and Schlumberger has entered into three key contracts.
6. SLB is financially sound, and it will grow its EPS at a 30% annually over the next three years.
7. The reopening of the Gulf of Mexico after the BP disaster should help with revenues.
8. It is selling under analysts’ price targets. The median analysts’ price target on SLB is $94, and Credit Suisse has a price target of $99 on Schlumberger.
Unfortunately, Schlumberger may also face some risks as it competes in global markets. One of the risks is related to politics. It is widely known that governments can destroy firms to obtain political gain or nationalize assets.
Furthermore, the company may also suffer from the deep fall of oil and gas prices. Its reliance on technology and acquisitions to increase revenues may be affected by a competitor developing better technology or the failure to meet expectations.
Last quarter results
Pretax operating income for Oilfield Services was $1.93 billion, which represents a $182 million sequential increase. Oilfield Services pretax operating income margin improved 77 basis points to 20.2%.
Schlumberger is financially healthy thanks to the strong free cash flow it has generated for years.
At the end of 2011, Schlumberger's debt/capital ratio is expected to be 25%, its EBITDA to be about 37 times its interest expense, and its total debt/EBITDA ratio to be 1.15 times.
Fortunately, the company has been able to avoid large debt burdens.
“The current financial turmoil has already resulted in a lower outlook for oil demand growth in 2012, although demand growth is still expected to exceed that of 2011. However, recent production data, as well as forward projections, indicate that there is a tight cushion of excess oil supply that will continue to support activity. Therefore, while the financial turmoil introduces some uncertainty over near-term activity, it has yet to have an impact on the actual activity of our customers,” says Paal Kibsgaard, the company's CEO.
Valuation
My fair value estimate is $94 per share, which implies a forward 2012 P/E multiple of 18 times and a forward 2012 EV/EBITDA multiple of 10 times. I think those multiples are appropriate for a firm that is a leader in its field, has a super-strong balance sheet and offers consistent earnings growth.
SLB is undervalued when I compare the current P/S, P/S and P/B valuation multiples to how the valuation was in the past 10 years. Schlumberger is trading in the low end of its valuation range.
In terms of international markets, Brazil, Mexico, Iraq and Russia are offering growth opportunities for the years to come.
Many of Schlumberger's markets can grow 10% annually with the complexity of the oil and gas reservoirs requiring more services to fully develop.
The firm's long-term operating margin in North America is expected to be around 23% just like the expectations in international markets, which will gradually recover from the last downturn.
Schlumberger's capital expenditures in 2011 and 2012 are forecast in $4.4 billion and $4.6 billion.
I like the fact that the new CEO, Paal Kibsgaard, leads one of the deepest and strongest management teams in the oil services industry.
The company's financial statements are very good and provide much insight into the business and industry.
During the former CEO's tenure, capital allocation was superb, and the firm made many useful technology-related acquisitions to maintain its R&D edge over its peers.
The company's return on invested capital has consistently been well ahead of its cost of capital over the years, and that dynamic is not expected to change in the near future.
