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Schlumberger: Value Creation Will Continue With Strong Growth Drivers

August 18, 2014 | About:
Value Investor

Value Investor

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Schlumberger Limited (SLB) provides technology, integrated project management and information solutions to the oil and gas industry. The company manages its business through Reservoir Characterization, Drilling and Production. Recent second quarter 2014 results are not impressive and this has resulted in 6% fall in stock prices in the past one month.

Also, rising concerns in Russia would make investors wary about this stock. I still believe the current decrease in price could be a good buying opportunity for a company with solid dividend yield and attractive valuations.

This article discusses why concerns in Russia would not have a significant impact on the company’s growth prospects and the drivers that will support strong growth outlook.

Russia should not be a concern

Increasing tension between Russia and the U.S. over Ukraine will not have a significant impact on the company’s operation. The primary reason is that Russia accounts for only 5% of the company’s total revenue. Also, the country has zero chances of exploiting deep water resources of $8.2 trillion worth of barrels without western companies as techniques like hydraulic fracturing would be required to unlock these resources.

This is also evident as Schlumberger and Halliburton (HAL) are working to resuscitate aging fields in Siberia and are estimated to spend $30 billion a year in Russia. In addition to this, Schlumberger has also helped a major Russian oil company reduce uncertainty in drilling and field development by using its own technology.

These facts suggest that companies like Schlumberger are crucial for Russian oil companies, and sanctions should not be a concern. According to the second-quarter update, the company has witnessed a strong recovery in activity after a harsh winter in Russia and expects this to continue with recent contract awards in Sakhalin, suggesting that operations in Russia should not be a concern to investors.

Growth Drivers

Global presence with broad diversity

The company has a significant presence globally. Every month the company conducts more than one million operating hours to understand and serve the customers in addition to identifying the market opportunities.

The company is also well positioned to leverage its scale of 1% improvement in cost base leading to a 5-cent increase in quarterly EPS. This could be achieved with the company’s broad resource base of 15,000 mobile assets, 2,500 operating facilities and around 8,000 suppliers along with an extensive transportation network and back office.

Schlumberger also has a broad diversity when it comes to workforce in the industry and this gives the company an added advantage over others. If we look at the company’s workforce we can find diversity in culture at all levels, this gives them very strong local knowledge both on the ground and corporate level. People with varying diversity bring unique ideas, and this has helped the company over 40 years to understand the need and requirements of its customers in different geographical locations.

Mergers and acquisitions

One of the biggest strengths of the company is its ability to combine small businesses with its own through acquisition. It has helped Schlumberger increase its technology capabilities and market penetration.

In addition to the drilling sector, the company has integrated best companies to create a software platform that would further help Schlumberger drive technology innovation. These mergers and acquisitions leverage the company’s footprint globally as well as complement the organic growth.

Some of the recent acquisitions have put Schlumberger in a competitive advantage over competitors like Halliburton and Bakers Hughes (BHI). The company is now better positioned to extract liquids from shale basin, which is a part of hydraulic fracturing, a booming business reshaping the industry.

Shareholder value creation

Currently, the company has a dividend yield of 1.50%. However, considering the factors discussed below, I believe Schlumberger will continue to increase its returns to shareholders.

Over the last three years from 2011-2013, earnings per share has increased by 17%; this is primarily due to revenue increase from $37,089 million in 2011 to $46,459 million in 2013. In addition to this, margin expansion and share buyback has also contributed to per share earnings increase.

With the company’s prime focus on shareholders' return, this growth is expected in the future as well. The company aims at growing its earnings at a CAGR of 17% to 20% for fiscal 2017. The growth would deliver an EPS of $9 to $10 in fiscal 2017 from the current $4.75.

This growth also seems reasonable with the company’s plan of returning 60% of earnings through dividend and stock buybacks which would increase shareholder wealth along with reasonable reinvestment in the business to drive growth.

Conclusion

Schlumberger’s shares have increased by 18% this year, and the stock still looks cheap with an estimated 9x EV/EBITDA for 2015 and 8x EV/EBITDA for 2016 when compared with historical 11 times.

Thus based on the company’s strong growth drivers and not so worrying situation in Russia, I believe Schlumberger’s profit will increase and consequently returns to the shareholders will increase.

About the author:

Value Investor
A value investor.

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