Schlumberger Promising For Investors Despite Recent Numbers

Jul.28.14 | About: Schlumberger Limited (SLB)

Summary

A 24% drop in net earnings has caused concern for many investors, especially when coupled with growing revenues.

Resolved issues in Mexico and Argentina should provide a strong second half in Latin America.

An earnings hit from certain non-recurring costs pushed margins lower for the quarter. Investors should expect an improvement in earnings during the next quarter.

Schlumberger Limited (NYSE:SLB) reported its Q2 revenue on July 17, worth $12.05 billion. When juxtaposed with the revenues of the first quarter of 2014 ($11.24 billion) and the second quarter of 2013 ($11.18 billion), it was a significant rise. Not only that, the Q2 revenue for the current year saw a 7% sequential rise with an 8% year on year growth.

International Operations revenue numbers touched the $8.09 billion mark, showcasing a growth of $0.604 billion (8% sequentially), whereas the North American revenue numbers were $3.89 billion, manifesting a rise of $0.205 billion (6% sequentially). Furthermore SLB topped the analysts' estimates ($11.95 billion) for the eleventh quarter running, with adjusted earnings per share of $1.37 outdoing the estimated per share earnings of $1.36.

Even so, despite all these lucrative numbers, SLB hasn't exactly been successful in wooing investor interest. And the primary reason behind this is the 24% plunge in the company's net earnings.

Improving Margins

Despite all the growth in revenue, SLB's year on year operating income declined 13% in the second quarter of this year, with the company witnessing a non-recurring gain on Sub Sea formation from the same quarter last year. This struck a blow to the operating and net margins of SLB in the first half of 2014.

Even so, after adjusting the operating and net income, one can see a palpable improvement in SLB's margins as compared to last year. The operating margin is up 150 basis points, while net margin has seen a hike of 45 basis points. And of course this has meant that H1 margins for 2014 have significantly improved as compared to the first half of 2013.

Liquidity Position

SLB's liquidity position doesn't fare well when compared with the industry average, as highlighted by the company's inability to pay for short term liabilities. But again, when one compares the company's current ratio to last year, one sees a slight improvement in the liquidity position following the culmination of the first half of 2014, as compared to the end of last year.

The company's debt profile, meanwhile, is tangibly better than its competitors, despite the debt-to-equity ratio not seeing any change in the first quarter of this year as compared to the numbers posted at the tail end of 2013. However, the company debt carrying prowess has enhanced in the previous six months, as showcased by the improvement in the CFO-to-debt ratio.

Similarly SLB's cash flow generation has been on the up over the past three years. The company's cash flows rose by a massive 35%, taking it ahead of its industry peers and manifesting SLB's undoubted ability to take care of obligations after cash investments.

International Maneuvers

Amidst the simmering international competition, SLB managed to post year on year revenue growth of 5%, owing to robust showings in Asia, Europe/Africa and the Middle East. With a staggering 24% pre-tax operating margin - something not witnessed since the global recession started in the year 2008 - SLB has every reason to be buoyant about its future.

SLB has also managed to avoid any negative impact owing to the Russian sanctions, showcasing a strong recovery following a typically harsh winter. The Sakhalin Island projects should also give the company the confidence to finish the year strongly in Russia.

Q2 activity in Latin America might not have left much to write home about, with revenue falling 3% to a mediocre $1.91 billion, but SLB still had reasons to rejoice owing to activities in Argentina, Venezuela and Ecuador, and the promise that Mexico brings. The Vaca Muerta shale activity in Argentina, and the fact that Mexico is expected to resolve its internal issues that had hampered SLB's growth by shutting down its rigs in the south of the country, means that it's safe to bet on much better Latin American numbers for SLB in the second half of 2014.

Saudi Arabia continues to be the vanguard of SLB's Middle Eastern growth, as the company posted Q2 revenue of $2.96 billion - a 12% hike. With SLB continuing to invest in the country, its Middle East and Asia numbers should continue to be strong despite the ongoing Iraq crisis.

North America, as is the case with most of SLB's industry peers, continues to be a lucrative zone, with the company's revenue witnessing a 16% jump as it posted an impressive $3.89 billion. This was despite the below par multi-client seismic sales. Unorthodox share plays, artificial lift and land drilling and hydraulic fracturing continue to ensure that SLB remains a prominent player in North America. The company's hierarchy suggests that it has a new stratagem in place for North America with focus on technology and efficiency, which should further expand SLB's regional presence.

Strong Outlook

Experts opine that as SLB expands internationally its outlook remains strong, especially when one factors in the company's onshore shale maneuvers. Political events continue to impact the oil market, as the global economy shows continuous recovery, but Brent crude would not be going below $100 per barrel; and hence, investment in the oil industry should continue to rise.

SLB's well-related levels of E&P investment are prognosticated to rise above 6%. This would be orchestrated by development, more so than production, with the company spending in exploration expected to remain flat, with oil firms focusing on generation of free cash flow.

The company's sales depend on the oil and gas outlook, which remains promising for the second half of 2014 and beyond. The oil and gas prices are expected to be less volatile as the year goes on.

Investment Prospect

SLB's recent numbers might not be towering above its peers, but its performance graph continues to be on the up. The performance in Q2 of 2014 has manifested solid improvement, and despite the plunge in net profits, SLB's outlook remains strong considering the fact that the factors pulling the profit down are non-recurring. Also, SLB's margins are on the rise as well.

Furthermore, SLB's free cash flows and CFO to debt ratio, highlight the company's prowess to repay its debt and pay the investors their dividend payments. The outlook is pretty strong for SLB and the general consensus is that the company's growth and its investors' profits are only heading in one direction: northwards.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within 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.