2 Key Oilfield Giants To Buy Now, 2 To Avoid

 |  Includes: BHI, DO, HAL, SLB
by: Stock Croc

The key word here is "oil," as in "not gas." While oil prices are forecast to be all over the map this year, the lowest I have seen is the potential for $70 per barrel from Royal Dutch Shell, PLC (NYSE:RDS.A). However, the prevailing view is for neutral to slightly higher oil prices for 2012. Natural gas, on the other hand, has fallen to historic, inflation adjusted lows, and many producers are scaling back their drilling plans for 2012 and beyond. I am going to look at four key oilfield supply companies, to see how they are coping in this environment.

Schlumberger LTD (NYSE:SLB)

Schlumberger is the world's leading oilfield service supplier. Over 90% of its revenue is on the upstream side of production, and it gets the remaining seven percent of revenue, and one percent of profits, by supplying downstream refining operations. Schlumberger's stock was selling recently at about $77 per share. Its 52-week range has been from $95.64 to $54.79, and it is trading at a price-to-earnings ratio of 21. It has a market capitalization of $103 billion, and recently raised its dividend by 10%, to pay a quarterly dividend of $0.275, for an annual yield of 1.4%.

Schlumberger has snapped back sharply from lean years in 2009 and 2010. Revenue in 2011 was up 44% from 2010, to $39.5 billion. Profits followed suit, up 40% to $4.78 billion, or $3.51 per share. Volume was up across nearly all of Schlumberger's worldwide markets. And Schlumberger's 2010 purchase of Smith International, Inc, while not yet accretive to earnings, has apparently gone through without a hitch.

Analysts are positive on Schlumberger, with a mean rating of 1.9. It has a 5-year expected PEG value of 0.67, indicative of an undervalued stock. Continued revenue increases from developing markets in Asia, and Brazil, along with cost savings from the Smith consolidation, will carry Shlumberger's earnings to up to eight dollars per share by mid decade. I see Shlumberger as a long-term buy at today's level.

Diamond Offshore Drilling, Inc. (NYSE:DO)

Diamond is a world leader in offshore drilling supplies. Historically, the Gulf of Mexico accounted for the bulk of its business, but more recently it has diversified geographically, so that in 2011 some 81% of its revenue was from overseas. Diamond stock was trading recently at about $62 per share. Its 52-week range is from $81.19 to $51.16, and its trailing 12 month price-to-earnings ratio is 9. It has a market capitalization of $8.6 billion. It pays a regular quarterly dividend of $0.50 per year, and lately has also paid a quarterly special dividend, which of late has been an additional $0.75 per quarter. The sum during 2011 was $3.50 for the year, for an indicated yield of 5.6%.

Diamond's 2011 earnings were nearly flat with 2010. Specifically, 2011 earnings were $962.5 million, versus 2010's $955.5 million. The per share earnings for 2011 and 2010 were $6.92 and $6.87, respectively.

2012 is likely to be a comparatively poor year for Diamond, as its earnings will be impacted by required, 5 - year testing on a number of its rigs. Utilization of drilling rigs is a key measurement for Diamond, as some of its rigs rent for over $300,000 per day. Analysts foresee earnings falling to $4.18 per share in 2012, And this from a company that was earning about $10 per share a few years ago. Diamond has tremendous potential if the offshore market gets rolling again. But I am not about to predict if and when that might happen, and do not endorse an investment in this company.

Halliburton Company (NYSE:HAL)

Halliburton is among the world's largest oilfield service companies, and also has made substantial investments in natural gas drilling, especially overseas. Its stock was trading recently at about $35 per share. Its 52- week range is from $57.77 to $27.21, and its trailing price-to-earnings ratio is 11.4. It has a market capitalization of $32.5 billion, and pays a quarterly dividend of nine cents, for an annual yield of 1.0%.

In the fourth quarter of 2011, Halliburton posted earnings of an even $1.00 per share, up nearly double from the $0.53 posted in the fourth quarter of 2010. For all of 2011, Halliburton earned $3.0 billion, or $3.26 per share. In 2010, earnings were $1.8 million, or $1.97 per share. Halliburton also recently got some pleasant legal news regarding its role in the Gulf Oil Spill, when the Court declared Halliburton would not be responsible for compensatory, third party claims, instead those would be BP's costs to bear. Halliburton's exposures for punitive damages, or for civil claims under the Clean Water Act, remain as before.

Halliburton has a very optimistic analyst rating of 1.7, and a 5-year, anticipated PEG of 0.34. The market has oversold Halliburton, and especially if any recovery is made in natural gas prices, there are few better bargains out there than this company.

Baker Hughes Inc. (NYSE:BHI)

Baker Hughes is another top tier oil and gas drilling supply company, with operations in 80 countries around the globe. Its stock was trading recently between $47 and $48 per share, toward the low end of its 52-week range of from $81.00 to $41.91. It is trading at a trailing price-to-earnings ratio of 12, and has a market capitalization of $20.8 billion. Baker Hughes pays a quarterly dividend of $0.15, for an annual yield of 1.3%.

Baker Hughes is on a sharp bounce back from a dismal period of earnings in 2009 and 2010. For all of 2011, adjusted earnings were $1.84 billion, or $4.20 per share, more than double 2010's adjusted earnings of $2.06 per diluted share. This was obviously a revenue driven improvement, as full-year revenue for 2011 and 2010 was $19.8 billion and $14.4 billion, respectively.

So is Baker Hughes really on a growth track? Maybe not so much. Analysts' mean earnings forecast for all periods has been lowered in recent months. For instance, earnings for 2012 were projected 60 days ago at $5.55 per share. That mean analyst forecast has fallen to $4.94 at the time of this writing. Similarly, the forecast for 2013 has fallen from $6.52 to $5.80. So there is not much doubt that trends are falling, and we all know expectations are more important than fundamentals when it comes to stock prices. I am much more comfortable in Schlumberger or Halliburton.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.