These 3 Oil And Gas Stocks Look Undervalued

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 |  Includes: HAL, NOV, SLB
by: Quinn Bredl

As oil has recently taken a tumble on weak economic data, so have the Oil & Gas Equipment & Services stocks. But even if oil takes a temporary hit, won't oil companies still need to buy equipment to continue operating? Of course. Energy is what makes the world go around; and whether you like it or not, people all over the globe will remain dependent on oil for decades to come. So here are some top dogs in the equipment and services industry which could be some of the best steals in the market right now.

Schlumberger Limited (SLB)

  • Market Cap: $86.07 billion
  • Current Share Price: $64.54
  • 52 Week Range: $54.79-$95.53
  • P/E: 16.32
  • PEG: 0.65
  • Price/Book Value: 2.66
  • Operating Margin: 17.23%
  • Profit Margin: 12.92%
  • Return On Equity: 16.10%
  • Total Cash: $4.08 billion
  • Total Debt: $10.17 billion
  • Current Ratio: 1.97
  • Dividend (%): $1.10 (1.70%)
  • Dividend Payout Ratio: 26.00%

Schlumberger is the largest company by market capitalization in this article, which can be looked at as a positive or negative thing. On the darker side you could argue that with such a large company there is not as much room for growth; on the brighter side you can say that it gives the company an advantage over competitors. But either way you perceive it, SLB seems to be priced very attractively right now with a PEG of 0.65 and a trailing P/E of 16.32. Here is a table of some recent year over year SLB earnings (found here) to give you an idea of the current earnings trend:

EPS Prior Year EPS Difference ($) Difference (%)
Q3'11: $.98 Q3'10: $.70 +$.28 +40%
Q4'11: $1.11 Q4'10: $.85 +$.26 +31%
Q1'12: $.98 Q1'11: $.71 +$.27 +38%
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In addition to solid earnings, Schlumberger boasts some very strong margins; an operating margin of 17.23% and profit margin of 12.92% give the company enough space to turn a healthy profit. Its balance sheet is also fairly clean with $4.08 billion in cash and $10.17 billion in debt. And with a current ratio of 1.97, the company could cover current liabilities 1.97 times over if ever necessary. Schlumberger also pays a modest 1.7% dividend with a low payout ratio of 26%.

Halliburton Company (HAL)

  • Market Cap: $25.81 billion
  • Current Share Price: $27.96
  • 52 Week Range: $27.21-$57.77
  • P/E: 8.73
  • PEG: 0.40
  • Price/Book Value: 1.88
  • Operating Margin: 18.72%
  • Profit Margin: 11.19%
  • Return On Equity: 25.29%
  • Total Cash: $2.76 billion
  • Total Debt: $4.82 billion
  • Current Ratio: 2.79
  • Dividend (%): $.36 (1.30%)
  • Dividend Payout Ratio: 11.00%

Halliburton is the smallest stock by market capitalization in this article, at less than half of its 52 week high of $53.32 billion. It also carries the lowest trailing P/E multiple at 8.73 with a PEG of 0.40. Here is a table of some recent year over year earnings for HAL (found here):

EPS Prior Year EPS Difference ($) Difference (%)
Q3'11: $.94 Q3'10: $.58 +$.36 +62%
Q4'11: $1.00 Q4'10: $.68 +$.32 +47%
Q1'12: $.89 Q1'11: $.61 +$.28 +46%
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Halliburton has a strong operating margin of 18.72% and profit margin of 11.19% (but keep in mind that the company expects both operating and profit margins to fall by over 3% due to an increase in the price of guar gum, which is used as an additive for hydraulic fracturing (fracking) fluids. But with such a low P/E, this could already be factored into the current share price). Halliburton's balance sheet is strong, with $2.76 billion in cash and $4.82 billion in debt. And if ever in a liability dilemma, HAL has an extremely high current ratio of 2.79. There's also a small 1.3% dividend involved, which incurs an extremely low payout ratio of only 11%.

National Oilwell Varco, Inc. (NOV)

  • Market Cap: $28.38
  • Current Share Price: $66.59
  • 52 Week Range: $47.97-$87.72
  • P/E: 12.91
  • PEG: 0.71
  • Price/Book Value: 1.56
  • Operating Margin: 20.27%
  • Profit Margin: 13.87%
  • Return On Equity: 12.51%
  • Total Cash: $3.39 billion
  • Total Debt: $510.00 million
  • Current Ratio: 2.36
  • Dividend (%): $.48 (0.70%)
  • Dividend Payout Ratio: 9.00%

National Oilwell Varco has excellent earnings power and seems to be a steal while trading at only 12.91 times trailing earnings with a PEG ratio of 0.71. Here is a table of recent year over year NOV earnings (found here.)

EPS Prior Year EPS Difference ($) Difference (%)
Q3'11: $1.25 Q3'10: $.97 +$.28 +29%
Q4'11: $1.37 Q4'10: $1.05 +$.32 +30%
Q1'12: $1.44 Q1'11: $1.00 +$.44 +44%
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National Oilwell Varco has the best operating and profit margins of the three companies at 20.27% and 13.87%, respectively. Out of the three, NOV also has the cleanest balance sheet with $3.39 billion in cash and only $510 million in debt while also having a strong current ratio of 2.36. If there's anything that could possibly deter an investor, it would be the miniscule dividend of only 0.7%; but although the dividend is so microscopic, it has much room to grow at a payout ratio of only 9%.

I believe that NOV is the best steal on this list because of its smart management which has been making acquisitions in order to expand business and spur growth. Just recently National Oilwell Varco bought Wilson International from Schlumberger, which will help NOV cater to a larger consumer base; and also reached a deal to purchase CE Franklin Limited ([[CFK]]), which Schlumberger holds a 56% stake in. These acquisitions show that management is confident in the industry outlook and is trying to put NOV ahead of the competition.

So with a bleak global economic outlook, it might be hard to see oil rebounding any time soon. But oil is a global necessity; as long as people inhabit the Earth, and as long as there is oil within the Earth, there will be a lasting demand for oil. With means of convenient electrically powered transportation many years down the road in prosperous countries, one can only imagine how long it may take to deliver that technology to Third World countries. As long as we wait for that time to come, these stocks should fare well in the long term.

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