Schlumberger: The Switzerland of Oil 11 comments
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Patrick Kirts co-wrote this article.
After seeing the historic volatility in oil over the last year, we at Portfolio Asset Management asked a simple question: How should we take on risk in the energy markets? Warren Buffett once said, “Risk is not knowing what you’re doing.” Others see risk as the chance of permanent loss. We agree with those ideas, so in this context we need an investment well positioned to handle the uncertainties of the oil market.
First, we don’t know where oil prices are going in the short term, and that means companies extracting or producing oil (E&Ps) have uncertainty in earnings. Second, the end user (you, me, and China) is under pressure. We saw Exxon (XOM) exit the gas station business this year as competition increased. Refineries and retail sales operations do not excite us. Third, political uncertainties are at fever pitch.
Oilfield services contractor Schlumberger (SLB) is the Switzerland of the energy industry. By focusing only on servicing fields, they gain the trust of their largest client base, independent oil companies, by not competing with them. National oil companies, which control 60% of the world’s reserves and are its second largest client base, do not want an integrated oil company competitor managing their oil fields. Even the large, integrated oil companies depend upon their services.
Over the past four decades, Schlumberger has built an international management team and workforce. The ability to share and act on innovation is at the core of their culture. This is in direct opposition to many competitors, who rely on management from their home countries.
The financial performance of Schlumberger over the past five years is impressive, and tells an interesting tale of business discipline and focused success.
First, let’s look at their earnings’ data over the past five years (all dollar amounts in millions):
Schlumberger’s total revenues have increased 132% over the past four years and its profits have increased 323%. (We use only four-year growth for this number because the low profits in 2003 would have artificially inflated it, and it is impressive as it stands. The reason for the low 2003 profit is discussed below.)
Perhaps most importantly, the net profit margin—the percentage of revenues, which are pure profit—has increased each year over the past five years. What has this company been doing to generate such profitable growth?
Let’s next summarize some important facts from its balance sheet.
We see that stockholders' equity has been growing year-to-year at an increasing pace; it has grown 153% over the past five years. The even greater appreciation of profits in that time shows impressive growth in the return on equity. Schlumberger has managed to build equity and profits without taking on significant debt.
Indeed, debt has been reduced by more than a third, and even when it has been added, as more than $1bn was in 2006, the debt-to-equity ratio continued to shrink. In the past five years, profits have increased faster than equity, which in turn has increased faster than revenues.
In contrast, the company’s number of employees has increased only 57% from 51,000 to 80,000, which shows that productivity per employee has increased substantially. In short, this company’s impressive growth and profitability has been driven, we think, by deleveraging, increased productivity, and growth from expanded operations.
Such impressive results were not always the case. In the past ten years, Schlumberger has made material changes to get a smooth-sailing ship. In 2002, Andrew Gould took over as CEO, and in 2003 they divested unrelated subsidiaries to focus only on their core business of oilfield services.
Schlumberger is a well known, well capitalized, and most importantly, well managed company in the oil industry. As investors found in the 1982 recession, if oil prices plummet and drilling activity ceases, then oil services companies will not make any money. This is a risk we are willing to take, and believe the current valuation is reasonable. Any subsequent pullback is an opportunity to rejoice and have shares go back to their rightful owners.
Full disclosure: Portfolio, LLC is long SLB at the time of this writing.
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This article has 11 comments:
A good article in all ways.
jegan ;-)
Actually, SLB is officially a Curacaoan company which is HQed in Houston, Texas. Having the base in neutral Curacao allows the company to "dance with the devil". Officially, Schlumberger Limited, based in Curacao is a holding company for all Schlumberger businesses around the world.