Schlumberger: A Long-Term Buy

| About: Schlumberger Limited (SLB)

The higher customer spending in the search for harder-to-reach deposits around the globe enabled Schlumberger Limited (NYSE:SLB) to post better-than-expected profits. The company's net income during the fourth quarter of 2013 climbed to $1.664 billion, or $1.26 per share, from $1.362 billion, or $1.02 per share, a year earlier, reflecting YoY growth of greater than 22%. Excluding the non-recurring charges per share earnings reached $1.35 per share, narrowly exceeding the analysts' estimates of $1.32 per share.

The two factors that caused the boost in fourth quarter earnings were: (1) higher demand for Schlumberger's products and (2) lower YoY costs and expenses. Let's have a detailed look at these drivers.

Top-Line Growth

Schlumberger's revenues grew 7.43% during the fourth quarter reaching $11.906 billion from $11.083 billion during 4Q2012. The main reason for the jump in the quarterly revenues was the solid activity in key international markets and strong year-end products, software and multi-client seismic sales in almost all segments. The international segment's revenue grew by $3.2 billion or 11% on the back of higher exploration and drilling activity.

The Middle East and Asia led the geographical results. Saudi Arabia and the United Arab Emirates as well as Malaysia and Australia are identified as the hot spots of demand. The sales in the Middle East and Asian region climbed 18% year-over-year. The sales in Latin America were also higher on account of a strong demand for work on deep-water exploration and project management activities in Argentina and Ecuador. These deep-water exploration and project management activities were also strong in Angola, Azerbaijan and Turkmenistan boosting the revenues of the Europe/CIS/Africa region.

For the drilling segment the underlying activity was robust as the demand for integrated project management work grew in Mexico, Saudi Arabia and Iraq. However, despite favorable scenarios in almost all of the key International markets Schlumberger fell short on revenues with regards to analysts' expectations. The analysts expected revenues to reach $12 billion during the fourth quarter but the company generated only $11.906 billion.

The revenues in this quarter were hurt as the company temporarily suspended its activities in Iraq in November after a protest involving Shiite Muslim workers and tribesmen as well as the seasonal slowdowns in North America, the North Sea, Russia and China.

Schlumberger's full year 2013 revenues grew by 8.47% compared to 2012's revenues with the international segment's revenue growing by 11% and the North American segment by 3%. On a segmental basis, the revenues from the reservoir characterization, drilling and production groups were up by 10%, 9% and 8%, respectively. Like the fourth quarter revenues, the full year revenues of the international segment were led by the Middle East and Asian regions that grew 23% from an expanding portfolio of projects and activities in Saudi Arabia and Iraq and the United Arab Emirates, increased seismic surveys, exploration and development work across Asia and sustained land and drilling activities in the Australian and Chinese Geo Markets.

The chart below shows that Schlumberger's revenues have grown for the fourth consecutive year reflecting the continuously increasing demand for the company's products.

Source: Company's SEC Filings


During the fourth quarter Schlumberger considerably cut its costs and expenses as a percentage of its revenues compared to the fourth quarter of 2012. Its YoY gross margin improved by 163 basis points and the operating margin improved by 237 basis points as the research and engineering and general and administrative expenses remained on the same level compared to 4Q12. There were no merger and integration and impairment charges for this quarter.

The company's net margin in this quarter improved by 169 basis points on a yearly basis. In this quarter the net margin was slightly squeezed compared to the fourth quarter of 2012 since the company did not earn any non-controlling income in 4Q13. However, in 4Q12 the company earned a non-controlling income of $48 million.

For the full year 2013, Schlumberger's operating margin jumped by 350 basis points to 25.7% versus 22.2% in 2012. If we compare Schlumberger's margins to its industry rivals then the company has the best operating and net margins.

The chart below shows that in each quarter of 2012 and 2013, Schlumberger posted better margins than two of its main rivals: Halliburton (NYSE:HAL) and Baker Hughes Inc. (NYSE:BHI). During the first two quarters of 2012, its operating margin was very close to Halliburton but then the company considerably improved its operating income and margin compared to its rivals.

Shareholder's Returns

Schlumberger's Board of Directors has approved a 28% increase in the quarterly dividend that is payable on April 11, 2014. The per share dividend from the first quarter of 2014 would be $0.4 per share and if the rate remains the same for the full year 2014 then the full year dividend would be $1.6 per share. From 2011, Schlumberger has constantly increased its yearly dividends. The company has a dividend yield better than the industry average.

Now let's have a look at the share repurchases. In the fourth quarter of 2013, the company repurchased 11.9 million shares of its common stock at an average price of $89.67 per share for a total purchase price of $1.07 billion. For full year 2013 the company made a stock repurchase program of $2.596 billion.

Outlook for 2014

The year 2014 looks bright for Schlumberger as the overall global economic outlook is projected to remain almost the same like in 2013 with fundamentals continuing to improve in the U.S. and Europe. As the worldwide demand for oil is expected to increase in 2014 the number of exploration and drilling activities should also increase. Barclays expects oil and gas companies to spend about $723 billion on exploration and production in 2014, denoting an increase of 6.1% from 2013's figure.

The demand for natural gas in Asia and Europe is also going to increase this year, eventually increasing natural gas prices. These improved statistics will add further growth in the company's top line and will offset the lower growth in some developing countries.

According to the company's Chief Executive Officer, Russia, the Middle East and China are expected to be the key international growth areas in 2014. According to him, the first quarter of this year will experience a seasonal decline and the biggest sequential earnings growth will come during the second and the third quarters.

Final Thoughts

The global economic scenario is highly in the favor of Schlumberger and helped it to improve its profit growth in 2013. The company has met analysts' expectations and it is projected that it will maintain its excellent performance in 2014 and result in an improvement for net earnings growth.

Besides receiving benefits from the favorable circumstances Schlumberger has also worked hard to improve its margins and boost the earnings.

From the investors' perspective, the company is paying a dividend yield that is better than the industry average and made considerable share repurchase programs in 2013. Based on this analysis, I would recommend buying the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by APEX Financial Consultants. This article was written by one of our research analysts. APEX Financial Consultants is not receiving compensation for this article (other than from Seeking Alpha). APEX Financial Consultants has no business relationship with any company whose stock is mentioned in this article.