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Company Overview

Schlumberger Limited (NYSE:SLB) is a supplier of technology, integrated project management and information solutions to the international oil and gas exploration and production industry. The company's segments include the Reservoir Characterization Group, which consists of the principal technologies involved in finding and defining hydrocarbon deposits; the Drilling Group, which consists of the principal technologies involved in the drilling and positioning of oil and gas wells, and the Production Group, which consists of the principal technologies involved in the lifetime production of oil and gas reservoirs and includes Well Services, Completions, Artificial Lift, Well Intervention, Subsea, Water Services, Carbon Services and the Schlumberger Production Management field production projects.

Current performance

Schlumberger Limited reported Q2 revenues of $11.18 billion, an increase of 5.8% and 8.1% compared to Q1 2013 and Q2 2012, respectively. Moreover, revenue has increased in every business segment of the company, with a lowest increase of 6% in the Production Group, and the highest of 11% in the Reservoir Characterization Group. Gross margin in the second quarter in 2013 was 22.1% compared to 21.5% for the same quarter last year. Net profit margin has also improved to 18.7% in Q2 2013, from 12.8% in Q2 2012. What is even more notable is that the operating margins across all geographies reached or exceeded 20%. Diluted earnings-per-share from continuing operations, excluding charges and credits, was $1.15 in Q2 2013, versus $0.97 in the previous quarter, and $1.01 in the second quarter of 2012.

From the above, it's clear that Schlumberger is able to maintain superior margins (which will be further illustrated in the comparison to competitors section) and have managed to grow earnings compared sequentially, and YOY.

company Comparable Analysis

I have used Baker Hughes Incorporated (NYSE:BHI), Halliburton company (NYSE:HAL), Weatherford International Ltd. (NYSE:WFT), and the industry averages for this comparison.


(Click to enlarge)

SLB trades at a lower P/E ratio than all of its direct competitors, as well as below the industry average; indicating that the market is undervaluing the stock. Furthermore, the return on equity (ROE), which is well above Halliburton, the nearest competitor, is close to double the industry average. This clearly shows the superiority that the company has in bringing value for investors' equity.

The gross and operating margins are further confirmation that SLB is able to allocate its assets to the most profitable deals, while exploiting its efficient technologies to squeeze every additional dollar out of earnings. In this line of business, each company has its approach which can significantly impact costs and directly affects the amount of profit extracted from each project undertaken. As seen from the above, SLB has been superior in that department.

Growth

SLB's last five fiscal years, EPS were $4.45, $2.59, $3.38, $3.67, and $4.1. Except the dip in 2009, which can be fairly attributed to the financial crisis, the company's EPS has been on a continuous growth. Diluted EPS in the most recent quarter have grown by 13.9% in comparison to the same quarter last year; and sales have seen growth of 12.29% over the last five years in comparison to the industry average of 8.76%. Moreover, out of the last four quarterly earnings announcements, the company has managed to beat the consensus estimate three times, having met estimates only once (never reported below estimates). All of these financial ratios and indicators point to a company that knows its business, and does it in manner which is continually bringing better results year over year, and quarter after quarter.

Dividends have also experienced phenomenal growth in the last years, growing by 19% in 2011 in comparison to 2010; 10% in 2012 in comparison to 2011; and on a quarterly basis in 2013 the company is distributing 13.6% higher dividend than in 2012.

The forecasted long term earnings growth for SLB is averaging around 15.78%.

Valuation

EPS for the first half of 2013 was $2.51, consensus EPS forecast for FY 2013 is $4.76, which means that for the second half the company has to earn $2.25. Of the last 5 years, only in 2008 has the first half shown higher earnings than the second. That, coupled with the previously mentioned fact that the company has consistently beaten earnings estimates, confirms my opinion that FY2013 earnings will be in the $4.90 region. With the current P/E ratio, this equates to a share price of $93.

SLB has a fairly volatile share price, despite its reliable earnings consistency. This creates plenty of buying opportunities as the price dips from time to time but, with the YTD returns of 26.65% as compared to Halliburton's 44.48%, I believe that the company's stock appreciation is not over.

Conclusions

In the line of business that SLB is in, oil and gas prices will always be a factor of company's performance. However, it is my belief that, given the outstanding company performance over its competitors, Schlumberger will continue to be more efficient and will wisely invest in the business segments that bring the most value to the shareholders.

The average dividend growth of 15% and a payout ratio of 32% makes it an attractive stock for dividend lovers and long term investors.

The leading role as a largest oilfield service provider gives Schlumberger the ability to leverage economies of scale, higher margins, the ability to raise debt at a lower costs, a stable business environment, and the ability to make acquisitions when opportunity presents itself.

Moreover, the stable financial position of the company, observed through better than industry average quick ratio, current ratio, total debt to equity; as well as the management effectiveness, observed through better than industry average ROA, ROI, ROE, presents a solid case for adding Schlumberger to your portfolio.

Source: Expect 7-10% Increase On Schlumberger By Year-End