Schlumberger Limited (SLB) reported 4th quarter and 2012 fiscal year earnings on Friday, January 18th of $1.08 per share, one cent above analyst estimates. Revenue for the year climbed 14% over the previous year and EPS increased 15.5% from 2011. Growth in 2012 was driven by a 16% increase in international revenue and North America benefited from strength in Gulf of Mexico. US offshore strength helped offset weakness in US land drilling services pricing. In 2013 the company believes E&P spending outside the US and Canada will increase by 10% and Schlumberger believes it can drive double digit EPS growth for the year. Furthermore, the company increased its dividend by almost 14%, however I still believe the 1.4% yield will not be that attractive to investors. Schlumberger has plenty of room to increase the dividend and I believe a higher dividend yield would help reduce volatility in the stock.
Schlumberger's returns have been highly correlated with the price of oil; the chart above compares the company's return to the return on United States Oil (USO). This chart indicates that the value of Schlumberger is becoming stretched compared to the price of oil. I also believe there are limited catalysts to drive the price of oil higher for some time other than unpredictable geopolitical events. I believe the, at best, moderate economic growth will not be enough to maintain elevated oil prices, and should WTI retreat below $90 per barrel it could be trouble for Schlumberger. Petroleum demand in the US was down 2% in 2012 over 2011, with distillates demand falling 4%.
When looking at Schlumberger compared with its peers, its valuation reflects the company's leadership position in the market. It has the highest EV/EBITDA ratio and the highest EV/Revenue ratio. I believe this is justified as the company has the most geographically diverse business and the fastest growth rate. Schlumberger is not overvalued as its PEG ratio is only two hundredths of a point higher than Halliburton (HAL) and is well below Baker Hughes (BHI), .89 verses 1.32.
The chart of Schlumberger may give the strongest reason to be on the short side of this stock. As the move higher after earnings has pushed to stock closer the $78 to $80 range where it has run into strong resistance over the past 18 months. I would look to get short if the stock starts to break down as it approaches $78 per share. I am not looking at shorting this company because of any missteps by management, which is tops in the industry. In fact any drop over $10 per share could be an interesting buying opportunity. It is a short based on valuation and a lack of economic strength needed to lift the stock. I believe WTI would have to hold above $100 or Brent would need to above $120 to provide the needed catalyst to get Schlumberger above $80 per share.
Data sourced from: Company filings, and Yahoo!Finance. Chart from: Freestockcharts.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.