Investors in Schlumberger (SLB) are having a great year. Stable and high oil prices continue to boost demand for the company's services as analysts at Baird are really positive on the company's future prospects.
While I really do like Schlumberger's long-term prospects, I am slightly cautious. I remain on the sidelines with a slightly bullish stance.
Baird Is Positive
Analysts at Baird initiated their coverage on Schlumberger, attaching an "Outperform" rating on the stock. The accompanied price target of $110 per share suggests that shares have some 26% upside potential from Thursday's closing levels.
Analyst Daniel Leben believes that the strong international mix will be a driver for growth. Leben is concerned about a later and slower recovery of North American margins. Yet any potential disappointment of the North American business which makes up a third of total revenues and earnings should be offset by international growth and margin expansion.
Therefore Leben sees Schlumberger as a core holding to leverage the continued growth in unconventional and offshore exploration and production.
Halfway through October, Schlumberger released its third quarter results. The company operates with $6.4 billion in cash and equivalents while total debt stands at $12.4 billion, resulting in a net debt position of $6.0 billion.
Revenues for the first nine months of 2013 came in at $33.4 billion, up 8.9% on the year before. Earnings rose by 22.8% to almost $5.1 billion. At this pace annual revenues are seen around $46 billion, as earnings could come in around $6.8 billion.
Trading around $87 per share, the market values Schlumberger at $114 billion. This values the equity in the firm at 2.5 times annual revenues and 16-17 times annual earnings.
The company pays a quarterly dividend of $0.3125 per share, for an annual dividend yield of 1.4%.
Some Historical Perspective
Long-term holders in the supplier to the oil and gas industry have seen decent returns. Shares rose from $30 in 2004 to highs of $100 in 2007 and 2008. Shares did see a correction towards $35 during the 2009 crisis but have recovered and traded in a $60-$100 trading range ever since.
Underlying this recovery is solid operational growth. Between 2009 and 2013, revenues are set to more than double towards $46 billion. The same applies for earnings, but note that the outstanding share base increased modestly in recent years.
Note that the 2010 acquisition of Smith International in an $11.3 billion deal was a large driver behind the growth.
Schlumberger is the largest and best diversified oil & gas service provider with superior product as well as geographical diversification. Despite the well documented domestic weakness for US onshore activities, the company is posting very strong results on the back of stable and high oil prices, resulting in another year of double digit growth.
Schlumberger generates roughly 70% of its revenues abroad as it has strong positions in Europe & Africa, as well as the Middle-East & Asia. This gives Schlumberger the best diversification as well as scale versus the likes of Halliburton (HAL), National Oilwell Varco (NOV) and Baker Hughes (BHI), among others. The company is well positioned in all major subsectors of the industry. Its reservoir characterization business helps oil and gas companies locate resources. The drilling segments sells the drilling equipment and engineering support to these companies, generating the vast majority of revenues. The production activities focus on pumping, cementing and intervention, among others.
Therefore, the company is largely insulated from the soft pricing for onshore services in North America, as the strong positions in offshore have provided a boost to the results.
On top of these outstanding results, Schlumberger is serious about paying out excess cash to its shareholders. The company pays an annual dividend yield of around 1.5%. So far this year, Schlumberger has repurchased $1.5 billion of its shares at a rate of 1.7%, resulting in solid combined returns for its shareholders. Note that earlier this year, the board authorized a new $10 billion repurchase program until 2018.
It has been a year since I last took a look at Schlumberger's prospects. At the time a disappointing update triggered a sell-off, but shares have risen by about a quarter even since. At the time I noted that the long term prospects for Schlumberger remain favorable in an energy hungry world. Yet the shale boom related oversupply was impacting earnings at the time.
Given the overcapacity I called the valuation fair and missed out on a 25% rally over the past year, in what has been a very good year for investing, marking flattish relative returns compared to the index. While I remain optimistic about Schlumberger's long-term prospects, given the superior diversification and scale, I remain on the sidelines with a slightly bullish stance.