Schlumberger: Not A Convincing Buy Despite Decent Earnings Report

Jul.22.12 | About: Schlumberger Limited (SLB)

Schlumberger (SLB) the provider of products and services for oil exploration and production announced its second quarter results on Friday. Investors reacted positively to the decent report, sending shares 1% higher in a general downbeat market.

Second Quarter Results

Schlumberger reported second quarter revenues of $10.45 billion which was up 5% compared to first quarter revenues. Revenues were up 16% compared to the second quarter revenues of 2011. Income from continuing operations rose 20% compared to last year to $1.4 billion. Diluted earnings per share came in at $1.05 which beat analysts estimates by $0.05 per share. The earnings per share compared to $0.96 in the first quarter of this year and $0.86 in the second quarter last year.

CEO Kibsgaard commented on the results, "solid activity growth and a consistent focus on execution led to results that continued to strengthen in the second quarter."

The company announced in May that it sold its Wilson distribution business to National Oilwell Varco for $906 million. It furthermore sold a 56% equity ownership interest in CE Franklin for approximately $122 million. The proceeds of both sales were partially used to repurchase 7.5 million shares for $499 million.

Segmental Information

The company reported a 7% increase in revenues in its reservoir and characterization business to $2.8 billion, driven by a strong performance at Schlumberger Information Solutions software sales. Drilling revenues rose 6% to $4.0 billion on robust international and offshore demand for Drilling & Measurement technologies. Production revenues rose 6% to $3.7 billion on increased sales of Artificial Lift and Completions products.

Revenues in North America fell 2% to $3.3 billion amidst weakness in the U.S. land hydraulic fracturing market, partially offset by strong offshore activity in the Gulf of Mexico. Revenues rose 5% in Latin America to $1.8 billion amidst the commencement of a project in Ecuador. Revenues for the European and African businesses grew 13% to $3.0 billion driven by strong demand for Schlumberger's products in the North Sea as well as in Russia for the Sakhalin project.


Amidst falling oil prices in recent months, Schlumberger maintains its focus on what the company can control. Strong execution and a balanced portfolio should ensure relatively strong performance according to executives. Last year the company reported annual earnings of $3.79 per share, but no official outlook was given for the entire year of 2012.


Schlumberger ended the second quarter with $3.5 billion in cash and short-term investments. The company held $10.5 billion in short- and long-term debt for a net debt position of roughly $7 billion. Schlumberger generated $20.3 billion in revenues for the first six months of 2012 on which it reported net profits of $2.7 billion, or $2.02 per share. Based on Schlumberger's current market value of $92 billion the market values the firm around 2.1 times annual revenues and 17 times earnings. The company pays a quarterly dividend of $0.28 per share for an annual dividend yield of 1.6%.

Schlumberger trades at a premium valuation compared to competitors National-Oilwell Varco (NOV) which is valued at 2.0 times annual revenues and Halliburton (HAL) valued at 1.1 times annual revenues. Both competitors trade at 13 and 9 times annual earnings, respectively.

Investment Thesis

Shares of Schlumberger trade roughly flat for the year around $69 per share after peaking at $80 in February. Shares have lost roughly 30% over the last five years as they traded around $100 per share in 2007.

Schlumberger has benefited from strong demand for energy across the globe and from a strong American base in recent years. Its strong market position, innovation capabilities and balanced portfolio has resulted in a premium valuation compared to its competitors. However, I see few short-term triggers for further price appreciation given the recent correction in oil prices, despite a solid performance in the latest quarter.

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