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Schlumberger’s Competitive Advantage Will Continue to Fuel Its Growth
Posted by: Sarfaraz A. Khan (IP Logged)
Date: February 28, 2014 10:44AM

Since the beginning of the current week, the shares of the world’s leading oilfield services firm Schlumberger (SLB) have risen by 2.7% on the back of a “Strong Buy” rating from Raymond James. The income of the oilfield services titan could benefit from favorable prices in pressure pumping industry caused by an upsurge in demand for fracking services following an increase in natural gas prices.

This positive commentary follows an upgrade from Credit Suisse earlier in January after the company released its quarterly results for the fourth quarter of fiscal 2013. The company posted significant growth in earnings due to a solid performance in the international markets, particularly the Middle East and Asia. The company has been growing on the back of increasing demand from oil companies that have been hunting for resources in the remote corners of the world.

Earnings Beat

In the final quarter of the previous fiscal year, Schlumberger reported a massive 22.2% year-over-year increase in net income to $1.66 billion, or $1.26 per share. This translated into adjusted earnings of $1.35 per share, an increase from $1.04 per share in the same quarter of 2012. On the other hand, analysts were expecting profit of $1.32 per share.

Meanwhile, the company’s revenues rose 7.4% from a year ago to $11.91 billion which was slightly lower than markets’ expectations of $11.99 billion.

In short, the company managed to beat earnings, but missed revenue estimates.

However, a long-term analysis shows that Schlumberger continues to grow its revenues and earnings, despite a challenging business environment in the onshore maket of North America. The company has benefitted from its significant exposure towards the international markets where it has reported solid growth. It has also grown on the back of an increase in deepwater activity, particularly in the Gulf of Mexico.

For the full year, Schlumberger’s revenues are up 8% to more than $45 billion. That marks a fourth consecutive increase in annual revenues.

More Profitable Than Others

Schlumberger has been more profitable than Halliburton (HAL) and Baker Hughes (BHI). The gross profit margins of the three companies over the last few years are shown in the picture below.


As shown in the picture, Schlumberger has generally stayed ahead of its competitors, particularly since 2012. Moreover, Schlumberger has also shown improvements in profitability. Its international margins have climbed 200 basis points to 22.2% which shows an improvement for two consecutive years.

Exposure to International Markets

Unlike its two big rivals Halliburton (HAL) and Baker Hughes (BHI), Schlumberger generates more than 60% of its revenues from international markets. The company witnessed disruption in operations in some of its key markets, but still managed to grow its international revenues and income, which is impressive.

As a matter of fact, the company’s robust growth in the international has driven its top line growth. For instance, in the previous quarter, Schlumberger’s international revenues climbed 18% year over year in the fourth quarter, a record for the company, and accounted for nearly two-third of the company’s total revenues.

The strong performance in the international markets can be attributed to an increase in activity in United Arab Emirates, Saudi Arabia, Malaysia and Australia.

Schlumberger earns higher margins in the international markets than at its home. As mentioned earlier, the company reported healthy international margins of 22.2%, which was above its North American margin of 19.7%.

Looking Ahead

As Schlumberger heads into 2014, it is expecting strong performance in Europe and Africa driven by higher levels of activity in sub-Saharan Africa and the North Sea. On the other hand, the company says that North America and Europe will remain challenging with sluggish growth in 2014. The Gulf of Mexico, however, will continue to support the company’s top-line growth.

For the long term, Schlumberger will continue growing on the back of higher deepwater spending. By the end of the decade, the deepwater expenditures will more than double to over $100 billion. This will translate into significant growth opportunities for Schlumberger and would offset all the negatives coming from sluggish growth in onshore North America and Europe.

Schlumberger’s competitive advantage lies in its large global footprint, which remains unparalleled in the industry. This enables Schlumberger to generate higher margins than its competitors. Considering the company’s remarkable growth in the international markets, we can assume that Schlumberger will continue to enjoy the higher margins in the coming years.

Performance Summary

In the last six months, Schlumberger’s shares have risen by 14%, slightly ahead of the broader S&P 500 ETF (SPY) which is up by 13.8% in the same period. The company, however, has been behind its rival Halliburton, which is up 15.7%, and Baker Hughes, which is up more than 33%.

Analysts have been extremely bullish on Baker Hughes, which could continue to outperform in the coming months. I have covered this topic in greater detail in my previous article.

As for Schlumberger, its shares are still looking attractive, despite the recent hike following the analysts’ upgrades. The company’s shares are priced 16 times current year’s projected earnings estimates, according to Thomson Reuters. In these terms, Schlumberger is more expensive than Halliburton and Baker Hughes. Schlumberger, however, is the industry leader with a solid track record of growth, and therefore commands a premium over its rivals.

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,
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