Schlumberger Poised for Success

Sep. 1.11 | About: Schlumberger Limited (SLB)

Schlumberger (NYSE:SLB) is an oilfield-services company that sells project management, technology, and information services to oil and gas companies across the globe. This energy stock is a hedge fund favorite and holds a $100 billion market cap. This company has been soaring as of late and its business as a whole is gaining momentum heading into the next couple months. The past few quarters, SLB has beat analysts earnings expectations. Adding to this the stock is trading at a great value compared to historical averages. Analysts are projecting this stock to rise over the course of the next 12-months. SLB receives a “Buy” recommendation from 86% of all research analysts, a huge upside going forward.

SLB is finally moving in the right direction. Last February SLB acquired Smith International, another energy services company, in an $11 billion dollar stock deal. SLB is now using these assets to the best of SLB's ability, increasing revenues all across the board. Smith helped contribute $275 million in income last quarter. This acquisition will also enhance SLB’s position in deepwater fluids and helps complement Smith’s fluids and drill bit engineering with SLB’s drilling and completion expertise. Smith holds a strong position in the deepwater U.S. Gulf of Mexico, which adds a strong, long-term growth catalyst. This bodes well for SLB, which out of all oilfield-services companies is the most overseas-oriented. We expect SLB’s business overseas to grow exponentially within the next year, particularly in Brazil as other nations are at the forefront of incremental upstream spending on oil and gas exploration.

I believe the two key growth drivers for the stock in 2011 are technology upgrades required for exploration and deepwater operations. Even with the drop in crude oil prices, I don’t believe there will be any drop in production, as oil producers still remain confident and optimistic about exploration drilling, which bodes well for Schlumberger and SLB's portfolio of oilfield services.

Schlumberger’s stock sells for a forward earnings multiple of 22, a 9% discount to the energy equipment and services industry average. The S&P reports also projects a 41% increase in SLB’s EPS rising from $3.75 to $5.28 led by higher operating margins. Net revenue for the second quarter of 2011 rose from $5.9 billion last year to $9.6 billion. Revenue from oilfield services specifically rose 51% contributing 90% towards revenue. Net income totalted $1.18 billion, up 22% from 2010. Schlumberger’s stock sells for a forward earnings multiple of 22, a 9% discount to the energy equipment and services industry average. In addition, the company repurchased $700 million worth of shares last quarter showing confidence within.

Many analysts expect SLB to kill it in the next year: Morgan Stanley has a bullish-scenario target of $180 for Schlumberger, a total yield of 110%. Trefis projects SLB to rise to $107, Credit Suisse has SLB at $115. In addition many top investors hold SLB in their portfolios. Boone Pickens' BP Capital has 3.62% of its portfolio invested in SLB, Jim Cramer currently holds it in his charitable trust, and Ken Fisher bought $700+ million worth of SLB in June. I expect Schlumberger’s stock to advance to $120 a share, a total yield of 45%. Throw on top of that a dividend yield of 1.3% and you have yourself quite an investment.

Disclosure: I am long SLB.