Schlumberger Is All Set To Outperform The Market

| About: Schlumberger Limited (SLB)

Summary

As of March 8th 2014, the consensus forecast among 42 polled investment analysts covering Schlumberger predict that the company will outperform the market.

Global exploration and production spending is expected to grow by around 6.1% to a record $723 billion in 2014, and there is a correlation of 0.60 between the company’s EPS.

Geographically, the company is positively diversified, as nearly 70 percent of its revenues are derived from international markets where the future growth is anticipated.

As of March 8th 2014, the consensus forecast among 42 polled investment analysts covering Schlumberger (NYSE:SLB), predict that the company will outperform the market. Schlumberger's future revenues depend on exploration and production (E&P) activities which in turn depend upon crude and gas prices. Drilling activity measures the ongoing work on authorized rigs as well as activity at new rig stations for which drilling permits have been issued.

However, there are other factors that can play their part when estimating the future outlook of the company. Companies that can ensure cost efficiency are more likely to be awarded services and maintenance contracts by E&P companies. For that reason, Schlumberger is investing heavily in research and development to improve existing technologies.

Operations Geography-wise

Full year 2013 revenue of $45.27 billion increased 8% versus the same period last year with international revenues 8% higher and North America revenues increasing 3% from the same period last year. The table below shows geographical contribution in revenues.

Schlumberger's international operations account for almost two thirds of its overall revenues and continued to do well. The increased international revenues were due to higher exploration activities, both offshore and in key land markets, in a number of Geo Markets particularly in the Middle East and Asia. The revenues from the Middle East and Asia increased 23%, mainly due to robust results across the diversified portfolio of projects and activities in Saudi Arabia, Iraq, and the UAE.

Similarly, in Asia, growth was primarily driven by the increased number of seismic activity in Malaysia, higher land and offshore services in Australia as well as the tight gas production management project in China. Going forward, the company expects that new technology deployments will help the company to make market share gains

The North America business contributes nearly 31 percent to revenues. The segment witnessed an increase of nearly 6.5 percent compared to last year but margins remained flat at around 19.6 percent. The flat margin was due to a reduction in rig counts and pricing weakness in the areas of drilling, simulation, and wire line. However, going forward, the company expects activity levels to rise across North America owing to more deepwater rigs in the Gulf of Mexico as well as stronger land based activity. But the pricing pressure could dampen the overall impact of higher activity on revenues and margins.

Overview of the Operating Segments

The company divides its operations into three primary segments: reservoir characterization, drilling and production. The table below demonstrates the company's segment wise performance throughout the year.

Let's discuss the performance of each segment with special reference to the future outlook.

  1. Reservoir Characterization

The reservoir characterization business involves prospecting for natural gas and oil reserves. During 2013, the company's reservoir characterization segment posted revenues of nearly $12.25 billion, representing an increase of 10 percent from the same period last year. The increase was primarily driven by higher market share coupled with higher exploration activities.

  1. Drilling

The drilling business explores the optimal drilling locations for identified oil or gas wells. For full year 2013, revenues from the segment increased by 9% as the drilling activity strengthened in the U.S Gulf of Mexico and Sub Sahara Africa. In addition, the increased rig counts in international land markets also contributed to increased revenues.

Click to enlarge

Source: bidnessetc.com

  1. Production

The production segment oversees all production activity over the lifespan of a well once it becomes operational. The revenues from the segment increased by 8% driven by increased well intervention activity coupled with strong sales of completion and artificial lift products. During the year, well services stage count in North American land also increased but revenues declined due to pricing weakness.

Concluding Remarks

The correlation between Schlumberger's earnings per share and capital expenditures of E&P companies is around 0.60. The chart below demonstrates the correlation between the two variables.

Click to enlarge

Source: bidnessetc.com

Given that the global exploration and production spending is set to grow by around 6.1 percent led by international activity and continuing strength in deepwater US Gulf of Mexico, I believe that the company has the potential to capitalize on the growth opportunities.

In addition, the company's international presence coupled with its large and diverse customer base also brings a range of growth opportunities. 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.