When looking to invest in the oilfield service sector three names should be analyzed: Halliburton (HAL), Schlumberger NV (SLB) and Baker Hughes (BHI).

There are many ways to compare companies with similar businesses. In this comparison, I will look at the company's revenues, operating margins, liabilities, working capital, debt to capitalization, return on capital employed, total shareholder returns and PEG ratio to find current and future estimate valuation. Based on these figures, we will get an idea of where the companies are coming from, and what to expect in the future.

**1. Revenue** - Revenue is the amount of money that is brought into a company by its business activities.

## Halliburton

- 2010 $17.973 billion
- 2011 $24.829 billion
- 2012 $28.503 billion
- Equals an increase of
*58.59%*

## Schlumberger NV

- 2010 $28.931 billion
- 2011 $37.089 billion
- 2012 $42.321 billion
- Equals an increase of
*46.28%*

## Baker Hughes

- 2010 $14.414 billion
- 2011 $19.431 billion
- 2012 $20.929 billion
- Equals an increase of
*45.20%*

When comparing the company's revenues to each other we can see that Halliburton's earnings have increased the most over the past three years. Halliburton's earnings have increased by 58.59% over the past 3 years.

**2. Operating Margin =** *Operating Income / Total Sales*

Operating margin is a measure of the proportion of a company's revenue that is left over after paying for variable costs of production, such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs such as interest on debt. If a company's margin is increasing, it is earning more per dollar of sales. The higher the margin, the better.

## Halliburton

- 2010 $3.009 billion / $17.973 billion = 16.74%
- 2011 $4.737 billion / $24.829 billion = 19.08%
- 2012 $4.159 billion / $28.503 billion = 14.59%

## Schlumberger NV

- 2010 $5.156 billion / $27.447 billion = 18.79%
- 2011 $6.239 billion / $37.089 billion = 16.82%
- 2012 TTM $7.191 billion / $42.321 billion = 16.99%

## Baker Hughes

- 2010 - $1.417 billion / $14.414 billion = 9.83%
- 2011 - $2.590 billion / $19.431 billion = 13.33%
- 2012 - $2.142 billion / $20.929 billion = 10.23%

At current levels, Schlumberger NV has the highest operating margin. The current operating margin for Schlumberger NV currently is 16.99%. Schlumberger NV currently has the highest margin of the group, Halliburton is next with a margin at 14.59% and Baker Hughes is last with a margin of 10.23%.

This implies that Schlumberger NV is the most efficient company of the three at keeping its revenue after paying for variable costs of production, such as wages, raw materials and more.

## 3. Liabilities

Liabilities are a company's legal debts or obligations that arise during the course of business operations, so debts are one type of liability, but not all liabilities. Total liabilities is the combination of long-term liabilities, which are the liabilities that are due in one year or more, and short-term or current liabilities, which are any liabilities due within one year.

## Halliburton

- 2010 $7.924 billion
- 2011 $10.461 billion
- 2012 $11.620 billion
- Equals an increase of
*46.64% or an increase of $3.696 billion*

## Schlumberger

- 2010 $20.541 billion
- 2011 $23.809 billion
- 2012 $26.689 billion
- Equals an increase of
*29.93% or an increase of $6.148 billion*

## Baker Hughes

- 2010 $8.886 billion
- 2011 $8.883 billion
- 2012 $9.421 billion
- Equals an increase of
*6.02% or an increase of $535 million*

Based on the above numbers, Halliburton has had the highest percentage gain in liabilities over the past 3 years. Halliburton's liabilities have increased by 46.64% or $3.696 billion. Schlumberger NV has the highest increase in liabilities based on an actual number as the liabilities increased by 6.148 billion but was a lower percentage at 29.93%. Baker Hughes was the most "conservative" of the three as the percentage increase in liabilities was 6.02% or $535 million.

**4. Working capital =** *Total Current Assets / Total Current Liabilities*

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital. The higher the ratio the better.

## Halliburton

- 2010 = $8.886 billion / $2.757 billion = 3.22
- 2011 = $11.577 billion / $4.121 billion = 2.81
- 2012 = $13.086 billion / $4.752 billion = 2.75

## Schlumberger NV

- 2010 = $18.098 billion / $10.865 billion = 1.67
- 2011 = $20.539 billion / $10.538 billion = 1.95
- 2012 = $24.156 billion / $12.368 billion = 1.95

## Baker Hughes

- 2010 = $8.707 billion / $3.139 billion = 2.77
- 2011 = $10.345 billion / $3.501 billion = 2.95
- 2012 = $10.990 billion / $4.127 billion = 2.66

All three companies are showing very strong working capital ratios. Currently Halliburton is showing the strongest working capital ratio at 2.75. Baker Hughes is next with a working capital of 2.66 and finally Schlumberger NV with a ratio of 1.95. As all of the companies have ratios well above 1, this indicates that all the companies would be able to pay off their obligations if they came due at this point.

**5. Debt to total capitalization =** *Capitalization Ratio = LT Debt / LT Debt + Shareholders' Equity*

(LT Debt = Long-Term Debt)

A measurement of a company's financial leverage, calculated as the company's debt divided by its total capital. Debt includes all short-term and long-term obligations. Total capital includes the company's debt and shareholders' equity, which includes common stock, preferred stock, minority interest and net debt.

The higher the debt-to-capital ratio, the more debt the company has compared to its equity. This tells investors whether a company is more prone to using debt financing or equity financing. A company with high debt-to-capital ratios, compared to a general or industry average, may show weak financial strength because the cost of these debts may weigh on the company and increase its default risk.

## Halliburton

- 2010 = $3.824 billion / $14.211 billion = 26.91%
- 2011 = $4.820 billion / $18.036 billion = 26.72%
- 2012 = $4.820 billion / $20.610 billion = 23.39%

## Schlumberger NV

- 2010 = $5.517 billion / $36.743 billion = 15.02%
- 2011 = $8.556 billion / $39.948 billion = 21.42%
- 2012 = $9.509 billion / $44.367 billion = 21.43%

## Baker Hughes

- 2010 = $3.554 billion / $17.840 billion = 19.92%
- 2011 = $3.845 billion / $19.809 billion = 19.41%
- 2012 = $3.837 billion / $21.105 billion = 18.18%

Currently, Baker Hughes has the lowest debt to capitalization. This indicates that Baker Hughes has the most equity compared with its long-term debt in a percentage basis. As this is the case, Baker Hughes has the most equity to support its operations and add growth on a percentage basis. As the ratio is decreasing and is the lowest of the group, financially this implies a slightly lower amount of risk.

**6. Return on capital employed =** *EBIT / (Total Assets - Current Liabilities)*

A ratio that indicates the efficiency and profitability of a company's capital investments. The higher the percentage the better.

ROCE should always be higher than the rate at which the company borrows otherwise any increase in borrowing will reduce shareholders' earnings, and vice versa. A good ROCE is one that is greater than the rate at which the company borrows.

## Halliburton

- 2010 = $2.952 billion / $15.540 billion = 19.00%
- 2011 = $4.712 billion / $19.556 billion = 24.09%
- 2012 = $4.120 billion / $22.658 billion = 18.18%

## Schlumberger NV

- 2010 = $5.363 billion / $40.911 billion = 15.02%
- 2011 = $6.537 billion / $44.663 billion = 14.64%
- 2012 = $7.531 billion / $49.179 billion = 15.31%

## Baker Hughes

- 2010 = $1.423 billion / $19.847 billion = 7.17%
- 2011 = $2.590 billion / $21.346 billion = 12.13%
- 2012 = $2.142 billion / $22.562 billion = 9.49%

As all of the companies' calculated return on capital employed is higher than the amount they borrow this is a positive signal. Currently, Halliburton has the highest ROCE. This implies that in 2012, Halliburton used the company's capital investments more efficiency and profitability than the other two companies.

**7. Total shareholder return** = *Share Price end selected time period + gross dividends delivered / Share Price start selected time period*

Total shareholder return or TSR is the difference between the share price at the start of the year and the share price at the end of the year, plus gross dividends delivered during the calendar year. This number is expressed as a percentage.

The total shareholder return of any major publicly traded companies can be directly compared. This will provide a way to determine how a company is performing against its industry peers.

*January 26th 2013 / January 1st 2010*

## Halliburton

$39.72 + $1.08 / $30.31 open price

$40.80 / $30.31 open price

*34.61% over the past 3 years*

## Schlumberger NV

$79.51+ $3.04 / $65.64 open price

$82.55 / $65.64 open price

*25.76% over the past 3 years*

## Baker Hughes

$45.61+ $1.80 / $41.22 open price

$47.41 / $41.22 open price

*15.02% over the past 3 years*

Over the past three years, Halliburton's total return to shareholders have been the greatest. Over the past three years, Halliburton's return to shareholders has increased by 34.61% while Schlumberger NV has returned 25.76% and Baker Hughes has returned 15.02%. Please note: even though Schlumberger NV has returned 25.76%, and this was is less than Halliburton. Schlumberger NV is the only company of the three that has raised its dividend over the past three years. The other two companies have maintained their dividends.

## Valuations

## 8. PEG Ratio = Price to Earnings Ratio / Annual EPS Growth

PEG Ratio indicates potential value of an equity and is calculated by dividing Price to Earnings (P/E) ratio into earnings growth rate. A low PEG ratio usually implies that the equity is undervalued, a high PEG ratio can indicate that the company is currently overvalued, where as PEG of 1 may indicate that an equity is reasonably priced under given valuations.

A. Average annual growth rate = (A / P) ^ (1 / T) - 1 = R

## Halliburton

B. Annual growth rate

- EPS 2010 = $2.02
- EPS 2011 = $3.08
- EPS 2012 = $2.84
- EPS 2013 = $3.00 (Estimate MSN Money)
- EPS 2014 = $3.91 (Estimate MSN Money)

(A / P) ^ (1 / T) - 1 = R

(3.91 / 2.02) ^ (1 / 5) - 1 = R

R = 14.12%

Earnings per share average growth rate over the 3 past years and estimated 2 years forward = 14.12%

Current PE Ratio = 12.80 (Seeking Alpha)

12.80 / 14.12 = 3.46

*PEG Ratio = 0.91*

A current PEG ratio of 0.91 based on an EPS average growth rate from 2010 to 2014 indicates that based on the next few years estimates the stock is currently undervalued.

## Schlumberger NV

B. Annual growth rate

- EPS 2010 = $3.38
- EPS 2011 = $3.67
- EPS 2012 = $4.10
- EPS 2013 = $4.76 (Estimate MSN Money)
- EPS 2014 = $5.86 (Estimate MSN Money)

(A / P) ^ (1 / T) - 1 = R

(5.86 / 3.38) ^ (1 / 5) - 1 = R

R = 11.63%

Earnings per share average growth rate over the 3 past years and estimated 2 years forward = 11.63%.

Current PE Ratio = 19.40 (Seeking Alpha)

19.40 / 11.63 = 1.67

*PEG Ratio = 1.67*

A current PEG ratio of 1.67 based on an EPS average growth rate from 2010 to 2014 indicates that based on the next few years estimates the stock is currently slightly overvalued.

## Baker Hughes

B. Annual growth rate

- EPS 2010 = $2.06
- EPS 2011 = $3.97
- EPS 2012 = $2.97
- EPS 2013 = $3.08 (Estimate MSN Money)
- EPS 2014 = $4.22 (Estimate MSN Money)

(A / P) ^ (1 / T) - 1 = R

(4.22 / 2.06) ^ (1 / 5) - 1 = R

R = 15.42%

Earnings per share average growth rate over the 3 past years and estimated 2 years forward = 15.42%

Current PE Ratio = 15.40 (Seeking Alpha)

15.40 / 15.42 = 1.00

*PEG Ratio = 1.00*

A current PEG ratio of 1.00 based on an EPS average growth rate from 2010 to 2014 indicates that based on the next few years estimates the stock is currently at value.

Using estimates provided by MSN Money and calculating the PEG ratio for each company, we can see that currently Halliburton has the most attractive PEG ratio. The ratio states that Halliburton has a PEG ratio of 0.91, while Baker Hughes has a ratio of 1.00 and Schlumberger NV has the highest ratio of 1.67

## Summary

Looking at the comparisons regarding the three companies revenues we can see that Halliburton's earnings have increased the most over the past three years. Halliburton's earnings have increased by 58.59% over the past 3 years.

In reviewing the operating margins of each company we can see Schlumberger NV is the most efficient company of the three at keeping its revenue after paying for variable costs of production, such as wages, raw materials and more.

Analyzing the liabilities of the three companies the figures indicate Halliburton has had the highest percentage gain in liabilities over the past 3 years. Halliburton's liabilities have increased by 46.64% or $3.696 billion. Schlumberger NV has the highest increase in liabilities based on an actual number as the liabilities increased by $6.148 billion but was a lower percentage at 29.93%. Baker Hughes was the most "conservative" of the three as the percentage increase in liabilities was 6.02% or $535 million.

As all of the companies are very strong and have ratios well above 1, this indicates that all the companies would be able to pay off their obligations if they came due at this point.

In reviewing the debt to total capitalization ratio we can see that Baker Hughes has the most equity to support its operations and add growth on a percentage basis. As the ratio is decreasing and is the lowest of the group, financially this implies a slightly lower amount of risk.

As shown by the numbers above, Halliburton has the highest Return of Capital Employed of the three. This implies that in 2012, Halliburton used the company's capital investments more efficiency and profitability than the other two companies.

When comparing the total return to shareholders of all three companies, Halliburton's total return to shareholders have been the greatest. Over the past three years, Halliburton's return to shareholders has increased by 34.61% while Schlumberger NV has returned 25.76% and Baker Hughes has returned 15.02%.

In calculating the PEG ratio for each company using MSN Money's estimates, we can see that currently Halliburton has the most attractive PEG ratio. The ratio states that Halliburton has a PEG ratio of 0.91, while Baker Hughes has a ratio of 1.00 and Schlumberger NV has the highest ratio of 1.67. This states that according to the ratio Halliburton is the most undervalued moving forward.

Based on the above information above Halliburton still looks to have the most potential upside, but also looks to have the most risk. The company has returned the most to its shareholders from January 1st 2010 at 34.61%, and looks to have the most growth moving forward according to the PEG ratio. Currently Halliburton is the only one of the three that has a PEG ratio below 1. This indicates that the company is currently undervalued compared to its past 3 years growth and analyst estimates moving forward. Halliburton also looks to have the most risk based on a financial perspective as the company has employed the most debt on a percentage basis of the group and currently has the highest debt to total capitalization ratio. Based on the above information Halliburton looks to have the most value moving forward.

For more information and other direct comparisons please read: Analyzing Schlumbergers Debt and Risk, Analyzing Halliburtons Debt and Risk and Analyzing Baker Hughes Debt and Risk.

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