What Can Schlumberger Offer Investors?

| About: Schlumberger Limited (SLB)

Schlumberger NV (NYSE:SLB) is the world's largest oilfield service company. Is it worth making an investment and what value does it offer shareholders? To answer these questions let us take a look at the company's recent performance and its ability to grow.

Future Seems Positive

Let's begin with the future of energy consumption that will directly affect the company's performance in the future. Energy consumption is expected to rise in the future. As shown in the following graph, the demand for oil equivalents will surge significantly over the next 20 years. China and India are among the economies where the demand for oil equivalents will rise at a faster pace than any other part of the world. Therefore, I believe companies like Schlumberger will take advantage of the rising demand curve for energy products.

SOURCE: Oilfield Equipment & Services report 2013

China and India were the fastest growing nations in the last two decades with annual GDP growth rates of 10.40% and 6.40% respectively. By 2040, China's energy consumption will double the US energy consumption. In order to meet the high demand, the company is increasing total average rig counts. This number has increased to 611 rigs in fiscal year 2013 from 495 rigs in fiscal year 2009. Rig count increased as a result of a surge in upstream exploration activity for oil, gas, and other unconventional hydrocarbons. Therefore, I believe the oil price is expected to increase in the future as a result of growing demand from the resource hungry economies.

According to a report, the oilfield equipment and services market is worth $750 billion a year. Moreover, global subsea oil and gas capital expenditure by region is expected to rise in the future. As shown in the following chart, capital spending in Africa and the Mediterranean region will be higher compared to the rest of the world in the near future. Therefore, I expect a rising demand for the products and services of the Schlumberger.

SOURCE: Oilfield Equipment & Services report 2013

In order to meet the rising demand for energy products, the companies operating in the oil and gas industry will enhance their exploration activity and that will eventually drive the demand for oilfield services. Thus, the rising price of oil and increasing demand for energy have encouraged firms operating in the oil and gas industry to look for energy resources even in remote areas. Therefore, I believe Schlumberger is going to experience high demand in the future and this will help the company to perform better.

Furthermore, exploration of deep-water and other remote sources of conventional energy sources has been increasing over the last few years. Exploration of these sources has too many technical and logistical complexities to the exploration projects that help companies like Schlumberger to bolster their revenues due to low competition. The following graph gives an over view of deep-water wells.

SOURCE: Company s Presentation

The chart above shows that the number of deep-water wells will increase to more than 1200 in 2020 from 600 wells in 2013. Therefore, I believe that such a huge increase in deep-water wells will bolster the company's revenues in the future.


Now let's have a look at the company's performance relative to its peers in the industry. The company's performance is better than its peer group. Its peer group includes Halliburton Company (NYSE:HAL), Baker Hughes Inc. (NYSE:BHI) and Weatherford International Ltd. (NYSE:WFT). As shown in the following graph the company's global revenues are much higher than those in its peer group.

SOURCE: Company s Presentation

Not only did the company manage to record higher revenues than its peers but it also managed to report better margins than its peer. As shown in the following chart the company's global operating margins were lower than Halliburton's margins until Q1 of fiscal year 2012 but later on the company outperformed all of its peers.

SOURCE: Company s Presentation

Final Note

The future of Schlumberger appears quite safe to me. Increasing energy consumption will drive the growth in the top and bottom lines. Furthermore, due to the technical and logistical complexities of deep-water exploration Schlumberger is among very few companies that are involved in deep-water exploration. Therefore, I believe that Schlumberger is going to experience strong growth in the bottom line.

On a multiple basis the company seems overvalued compared to the industry. However, the company's PEG ratio is much lower. The company is trading at a PEG of 0.85 times which is much lower than the industry's average of 2.22 times.

In addition, the company's dividend yield is 1.77 percent which is well below than the industry average of 2.36 percent. However, the company's dividends grew at a faster pace than that of the industry average. The dividends of the company grew by 7.62 percent while the industry's dividends grew by 5.67 percent. Therefore, I 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. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.