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Schlumberger is the Largest Oil-Service Company in the World and Fits Any Portfolio

August 21, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at Schlumberger Limited (SLB), a $141.86 billion market cap company, which is a leading oilfield services company providing equipment and technology to the oil and gas industry worldwide.

A dominant firm

Schlumberger is the global leader of oil services and provides everything to the industry. The firm operates in a growing industry where service intensity of Arctic drilling, deep-water exploration and global proliferation of unconventional drilling are increasing.

International operations

The company focuses on international operations; it generates about two-thirds of its revenues outside the U.S. North America generated 31% of Oilfield Services total revenues in 2013. North American margins were almost 20% in 2013 and international margins were 22.2%. Margin improvement is an important factor as well as growth in regions like Middle East/Asia, Europe and Africa. Venezuela and Argentina´s operations are key drivers of Latin America revenues.

Long run

I think the oil-services industry will continue to expand in the future. Oil has become more expensive to extract, and this is good for oil-service firms.

Efforts on R&D and some good acquisitions extend its product portfolio and allow the firm to increase market share and profitability.

The principal challenge is to find new reserves in increasingly remote locations and greater water depths offshore. The ability to locate and exploit these reserves places greater importance on the capabilities of oil-service firms.

Principal risk

The main risk facing the oil-service industry is lower oil prices, which would immediately constrain capital budgets and probably lead to lower revenue growth.

Revenues, margins and profitability

Looking at profitability, revenue grew by 7.8% but earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($1.37 vs $1.66). During the past fiscal year, the firm increased its bottom line by earning $5.11 versus $3.91 in the prior year. This year, Wall Street expects an improvement in earnings ($5.70 versus $5.11).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

SLB

Schlumberger

17.06

BHI

Baker Hughes Inc

6.19

HAL

Halliburton Co.

15.65

WTF

Weatherford International PLC

-4.23

 

Industry Median

7.78

The company has a current ROE of 17.06% which is higher than its peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

1408507282051.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of21.8x, trading at a discount compared to an average of 22.4x for the industry. To use another metric, its price-to-book ratio of 3.6x indicates a premium versus the industry average of 1.7x while the price-to-sales ratio of 3.1x is above the industry average of 1.31x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $21,879, which represents a 17% compound annual growth rate (CAGR).

1408507241647.png

Compared to its closing price of one year ago, share price has jumped by 28.9%.

Final comment

Schlumberger's size has helped to gain experience in all regions and oil reservoir types. With strong focus on international operations as well as R&D and acquisitions, I think it is a good candidate for long-term portfolios.

The PE relative valuation and the return on equity that significantly exceeds the industry average makes me feel bullish on this stock.

Hedge fund gurus like John Hussman, Ray Dalio, John Burbank, Tom Gayner, Ruane Cunniff, Ken Fisher, David Rolfe, Ken Heebner and Murray Stahl added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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