Investing In The Oil Services Sector Based On Free Cash Flow

| About: Core Laboratories (CLB)
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Without an energy company in my portfolio, I started researching oil & gas service companies to decide which one would be a good fit with my investment objectives. I typically prefer smaller stocks that are not well covered by analysts, with the hope that some good research and due diligence will help me find that "diamond in the rough". I also believe that companies that generate substantial amounts of free cash flow every year will deliver the best risk adjusted returns. This research led me to Core Laboratories (NYSE:CLB), which I quickly realized is a technology company operating in the oilfield. I'll discuss the proprietary technology that the company leverages to generate great returns in my next article, but this article will focus on Core Labs valuation in relation to its peers.

Peer Group

Although Core Labs is not a drilling company or manufacturer of drilling equipment, its peer group is typically comprised of companies that offer oilfield services like Haliburton (NYSE:HAL), Schlumberger (NYSE:SLB), Baker Hughes (BHI), and National Oilwell Varco (NYSE:NOV). The following table is comparison of the typical company metrics, according to Yahoo Finance after the close on Sept. 6:


Core Labs



Baker Hughes

National Oilwell Varco







Market Cap

7.16 B

45.3 B

113 B

21.7 B

33.4 B

Div. Yield






PEG (5 year exp.)






As you can see, Core Labs is a much smaller company than its peers, and also sports a slightly lower dividend yield. The average P/E of its peer group is 19.5, which is a 61% discount to Core Labs P/E of 32. The expected 5 year PEG ratio of 1.60 indicates that investors are willing to give Core Labs a higher valuation than its peers.

Cash Flow

I like to invest in companies that are shareholder friendly, which typically requires a company to generate substantial free cash flow. The table below shows how each company is valued, based on free cash flow (cash flow minus capital expenditures).


Core Labs



Baker Hughes

National Oilwell Varco

Stock Price






Free Cash Flow

239 M

679 M

4.43 B

280 M

1.16 B

Shares Outstanding

45.97 M

913.58 M

1.32 B

443.04 M

427.52 M

Price/FCF per share






Based on the trailing twelve month FCF, Schlumberger has the cheapest Price/FCF per share ratio at 25, followed closely by National Oilwell Varco at 29, and Core Labs at 30. Haliburton and Baker Hughes have both generated very little FCF per share, which is probably the reason the market gives them the lowest PEG ratio.

Debt Load

When comparing companies with many of the basic valuation metrics, debt load is not taken into account. Higher debt loads will eat into FCF which will limit the amount of money a company can return to shareholders. The table below shows how much net debt (Long Term Debt - Cash) each company has per share, along with the ratio of the debt divided by FCF.


Core Labs



Baker Hughes

National Oilwell Varco

Net Debt

226.8 M

3.41 B

6.51 B

2.72 B

1.79 B

Debt per share






FCF per share












What the debt/FCF ratio basically defines is the amount of years that each company would have to use FCF to pay down long term debt, assuming that FCF and debt levels remain steady.

12 Month Returns


Core Labs



Baker Hughes

National Oilwell Varco

Stock Price Gain, excl. div.






EPS growth (y/y)






Both Core Labs and Schlumberger stock price outgained EPS growth, indicating P/E expansion. Haliburton and Baker Hughes both saw stock price gains while EPS growth was negative, indicating that investors believe the company will become more profitable in the future. National Oilwell Varco was the only company to see its stock price decline, which was in the same year it posted 25% EPS growth, indicating that investors expect the company to have difficulty posting EPS growth again this year. I don't do much technical analysis, however, I do like companies that are experiencing P/E expansion.


Based on my investing preference, Core Labs and its Price/FCF ratio of 30 looks reasonably priced, whereas Haliburton and Baker Hughes are companies I would not invest in. Although each company could be in midst of a turnaround through EPS growth, cutting expenses, or completion of large capex program, they just simply haven't generated enough FCF per share. National Oilwell Varco isn't getting much respect from the market right now, as the company generated substantial FCF and posted the largest EPS growth rate over the past 12 months, only to see negative stock price returns. Additional research would be needed to determine why the market is expecting a bumpy ride in the coming year. Schlumberger has very attractive valuations to me, particularly with a Price/FCF ratio of only 25, Debt/FCF ratio of 1.47 and PEG of 1.02. I wonder if Schlumberger is getting a lower valuation than Core Labs simply because of its Market Cap of 113 Billion. I plan to do more research on Schlumberger to see if it has any competitive advantages that can be leveraged to keep generating FCF, and in turn, investor returns.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CLB over 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.