Seeking Alpha
What is your profession? ×
Long/short equity, special situations, value
Profile| Send Message|
( followers)

Shares of Schlumberger Limited (SLB) fell 1.1% in Friday's trading session, in a generally downbeat market. This oil and natural gas industry supplier reported its third quarter results before the market open.

Third Quarter Results

Schlumberger reported third quarter revenues of $10.61 billion, up 11% on the year. Revenues fell slightly short of analysts expectations of $10.68 billion.

Income from continuing operations came in at $1.44 billion, up 10% on the year. Earnings per diluted shares rose from $0.96 last year to $1.08 per share, up 12% on the year. Earnings beat analysts consensus of $1.06 per share.

During the quarter, Schlumberger repurchased 2.2 million shares at an average price of $68.19, for a total consideration of $149 million.

CEO Paal Kibsgaard commented:

"Our third-quarter results reflected steady international growth although performance in regional markets varied through activity mix and changes to project schedules. Key markets, both on land and offshore, continued to drive performance as international demand for reservoir characterization and drilling services more than offset weakness in the North America pressure pumping market."

Segmental Update

Reservoir Characterization

Revenues in the reservoir characterization business came in at $2.91 billion, up 17% on the year. Revenues increased as a result of higher WesternGeco marine vessel utilization in the North Sea and the Kara Sea. Operating earnings rose 38% to $838 million, as operating margins rose by 430 basis points to 28.8%. Higher utilization rates and strong pricing boosted margins.

Drilling

Drilling revenues came in at $4.05 billion, up 13% on the year. Revenue growth was driven by growth in international offshore services, especially in the Middle East. Operating earnings rose 21% to $733 million, as operating margins rose by 120 basis points to 18.1%.

Production

Revenues for the production division came in at $3.67 billion, up 6% on the year. Schlumberger saw weakness in North America as oversupply of hydraulic horsepower put pressure on pricing. Performance in the Middle-East, Africa and Russia remained strong.

As a result of weakness in North America, operating profits for the division fell 24% to $548 million. Operating margins fell 570 basis points compared to last year to 14.9%, as US rig count dropped significantly, putting pressure on prices. At the same time, margins suffered from cost inflation of raw materials.

Valuation

Schlumberger ended its third quarter with $4.8 billion in cash and short-term investments. The company operates with $11.2 billion in short and long-term debt, for a net debt position of $6.4 billion.

For the first nine months of 2012, Schlumberger reported revenues of $31.0 billion. The company net earned $4.1 billion, or $3.08 per share. At this rate, the company could report annual revenues of $42 billion, on which the firm could earn $5.5 billion, or $4.20 per share

The market currently values the firm at $98 billion. This values Schlumberger at 2.3 times annual revenues and 18 times annual earnings.

Currently, Schlumberger pays a quarterly dividend of $0.28 per share, for an annual dividend yield of 1.5%.

Investment Thesis

Year to date, shares of Schlumberger have risen some 8%. Shares rose from $68 in January to highs of $80 in February. Shares fell back to $60 in the summer months, after oil prices corrected on the back of worries over global economic growth. Shares have since recovered to levels around $74 at the moment.

Over the past five years, shares have fallen roughly 25%. Shares fell from $100 in 2008 to lows of $35 in 2009. Shares recovered to $95 in 2011, but have fallen back comparatively to $75 at the moment. Between 2008 and 2012, revenues rose from $27.2 billion to an expected $42 billion in 2012. Net income remained unchanged at around $5.5 billion.

Shareholders seem to be reasonably happy with the results, as Schlumberger's shares fell a mere 1.1% on Friday. The S&P 500 lost 1.7% during the session on the back of disappointing corporate results, including the latest releases by McDonald's (NYSE:MCD) and General Electric (GE). Investors are happy that strength in the exploration and deepwater business continues, offset by a disappointing performance at the production division. Increased efficiency resulted in a margin improvement, allowing Schlumberger to beat on the bottom line.

Shares appear to be fairly valued at these levels. Schlumberger has a dominant position in a long-term growth industry, which is being plagued by short-term overcapacity in North America. Shares trade at 18 times earnings, but the company should be able to demonstrate further earnings growth in the coming years. The company pays out a mere 1.5% dividend yield to cover the reinvestment needs of its business, and to control its net debt position of $6.4 billion.

I remain on the sidelines, but could be a buyer on large dips.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.