Why Schlumberger's Stock Is A Long-Term Investment Opportunity

| About: Schlumberger Limited (SLB)

Summary

As the world's leading oilfield services company, SLB will continue to benefit from the rising prices of oil and natural gas.

SLB has good valuation metrics and strong earnings growth prospects; its PEG ratio is very low at 0.86.

SLB’s forward annual dividend yield is at 1.48% and the payout ratio is only 25.0%.

The annual rate of dividend growth over the past ten years was high at 12.5%.

Schlumberger Limited's (NYSE:SLB) stock has surged strongly this year. In fact, its relative strength index [RSI] technical indicator is indicating overbought conditions. Since the beginning of the year, SLB's stock has gained 20.1%, while the S&P 500 index has increased 4.8%, and the Nasdaq Composite Index has risen 3.2%. Moreover, since the start of 2013, SLB's stock has gained 56.2%, while the S&P 500 index has increased 35.8%, and the Nasdaq Composite Index has risen 42.8%. Nevertheless, considering its good valuation metrics, its strong earnings growth prospects, and its leading position in the industry, Schlumberger's stock is not expensive, and in my opinion, it still has plenty of room to move up. Furthermore, the growing dividend represents an income.

The Company

Schlumberger is the world's leading oilfield services company. Schlumberger supplies technology, integrated project management and information solutions to oil and gas exploration and production industries worldwide. The company was founded in 1926 and is based in Houston, Texas.

Valuation Metrics

The table below presents the valuation metrics of SLB; the data were taken from Yahoo Finance and finviz.com.

Schlumberger's valuation metrics are good; the enterprise value-to-EBITDA ratio is low at 11.83. According to Yahoo Finance, SLB's next financial year forward P/E is low at 15.99, and the average annual earnings growth estimates for the next five years is very high at 18.65%. These give a very low PEG ratio of 0.86. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio, because it also accounts for growth. A lower PEG means that the stock is more undervalued.

Latest Quarter Results

On April 17, Schlumberger reported its first-quarter 2014 financial results, which beat EPS expectations by $0.01 (0.80%) and missed on revenues. The Company reported first-quarter 2014 revenue from continuing operations of $11.24 billion versus $11.91 billion in the fourth quarter of 2013, and $10.57 billion in the first quarter of 2013. Income from continuing operations attributable to Schlumberger, excluding charges and credits, was $1.59 billion-a decrease of 11% sequentially, but an increase of 23% year-on-year. Diluted earnings-per-share from continuing operations, excluding charges and credits, was $1.21 versus $1.35 in the previous quarter, and $0.97 in the first quarter of 2013.

In the report, Schlumberger CEO Paal Kibsgaard commented:

Growing new technology sales and expanding integration activity drove our first-quarter results despite the severe winter weather that impacted operations in Russia, China and North America. While the sequential results displayed the usual drop in product, software and multiclient license sales following strong year-end figures, our solid year-on-year growth rates were led by the Middle East & Asia and North America Areas although all geographies benefitted from an increasing focus on operational excellence and efficiency.

Dividend and Share Repurchase

Schlumberger has been paying uninterrupted dividends since 1982, the forward annual dividend yield is at 1.48%, and the payout ratio is only 25.0%. The annual rate of dividend growth over the past three years was high at 13.0%, over the past five years was at 7.6%, and over the past ten years was also high at 12.5%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and SLB's performance has been very good in this respect.

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Source: Charles Schwab

Since Schlumberger is generating strong cash flow, and the payout ratio is very low, I believe that the company is well-positioned to achieve steady dividend growth going forward.

During the quarter, Schlumberger repurchased 9.96 million shares of its common stock at an average price of $90.31 per share for a total purchase price of $899 million.

Competitors

A comparison of key fundamental data between Schlumberger and its main competitors is shown in the table below.

There is not a big difference between Schlumberger's valuation metrics and those of its competitors. However, SLB has the highest dividend yield among the stocks in the group.

SLB's Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the table below.

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Source: Portfolio123

Technical Analysis

The charts below give some technical analysis information.

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Chart: finviz.com

The SLB stock price is 5.12% above its 20-day simple moving average, 7.14% above its 50-day simple moving average and 17.72% above its 200-day simple moving average. That indicates a short-term, mid-term, and a long-term uptrend.

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Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.82 and ascending, which is a bullish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 75.55 which indicate overbought conditions.

Analyst Opinion

Many Analysts are covering the company and most of them recommend the stock. Among the 36 analysts, 15 rate it as a strong buy, 18 rate it as a buy, and only three analysts rate it as a hold.

TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering SLB stock, there are only eight analysts who have the four or five star rating, and all of them recommend the stock.

On June 13, BofA/Merrill Lynch analyst Douglas Becker told clients to buy Schlumberger ahead of the June 24-25 investor conference, saying the company's "corporate transformation" could offer significant upside. The firm reiterated a Buy rating and price target of $119 on SLB but said they could see shares at ~$155 in an upside scenario as 2016 expectations get discounted.

Major Developments

On March 13, 2014, Schlumberger announced that it had entered into an agreement to purchase the remaining shares of SES Holdings Limited ("Saxon"), a Calgary-based provider of international land drilling services, from First Reserve and certain members of Saxon management. Saxon currently operates a fleet of 87 rigs (70 drilling and 17 workover) in 10 countries, and provides support services to an additional 35 rigs worldwide. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals.

According to Schlumberger, the fundamentals of the global economic recovery remain intact in spite of the unusually harsh winter weather in parts of the Northern Hemisphere, some signs of a slowdown in growth in China, and the unsettled situation in Ukraine. These factors, however, are likely temporary in nature and the oil markets continue to be tighter than once anticipated, driven by strong demand trends, lower spare capacity figures and a fall in OECD stocks.

As the world's leading oilfield services company, Schlumberger will continue to benefit from the rising prices of oil and natural gas. Oil and natural gas prices have been rising from the start of the year. WTI crude price has risen 17.9% from its low of $90.69 per barrel on January 09, 2014, to $106.91 per barrel on June 14, while Henry Hub natural gas price has risen 14.3% since the beginning of the year to $4.739 per Million Btu.

WTI crude July 2014 leading contract

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Henry Hub natural gas July 2014 leading contract

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Charts: TradeStation Group, Inc.

Conclusion

As the world's leading oilfield services company, Schlumberger will continue to benefit from the rising prices of oil and natural gas. Schlumberger has good valuation metrics and strong earnings growth prospects; its PEG ratio is very low at 0.86. Schlumberger is generating strong cash flows and it returns value to its shareholders by stock buyback and by increasing dividend payments. All these factors bring me to the conclusion that SLB stock is a smart long-term investment.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SLB over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.