For Schlumberger, Big Is Beautiful

8/26/2013


  Recent Price
$81
  Dividend
$1.25
  Yield
1.6%
  P/E Ratio
19
  Shares (millions)
1,336
  Long-Term Debt as % of Capital
20%
  52-Week Price Range
$85.02 - $66.85

Scale has become a burden for oil majors struggling to grow their production, but Schlumberger ($81; SLB) can still count it a blessing. Founded in 1926, Schlumberger operates in all major facets of oilfield services, essentially covering the lifespan of reservoirs that house natural gas and oil.

About 75% of the 27 energy equipment and services companies in the S&P 1500 Index have market values below $5 billion. By comparison, Schlumberger's market capitalization tops $106 billion — more than twice that of its next biggest peer, Halliburton ($47; HAL). Schlumberger's scale — greater operating cash flow than its three largest U.S. rivals combined — allows the company to pursue opportunities worldwide. North America generated 31% of sales for the 12 months ended June, followed by Europe and Africa (28%), Middle East and Asia (23%), and Latin America (18%).

Analyst estimates are rising, with the consensus now projecting Schlumberger's per-share profits will grow 20% in the second half of 2013 and 21% in 2014. Schlumberger is a Buy and a Long-Term Buy.

Wealth from wells

The U.S. land-drilling industry suffers from declining rig counts and relatively weak pricing. But international markets have rebounded, especially Saudi Arabia, China, and Australia. Schlumberger has shifted its near-term focus overseas, resulting in fatter profit margins from growth in exploration, seismic, and deepwater services.

All three of the company's business segments grew sales at least 7% in the past year, with the strongest growth (13%) coming from Schlumberger's most-profitable business, reservoir characterization. Reservoir characterization (27% of 12-month sales, 39% of earnings before taxes) helps uncover oil and natural gas through strategies such as evaluating underwater rock formations.

The drilling unit (38%, 34%) sells drill bits and other tools, and provides engineering expertise for drilling and positioning wells. The production business (35%, 27%) offers well-completion, pumping, and subsea services.

Long-term growth could benefit from a proposal by Mexico's new president, Enrique Peña Nieto, to open up the state-controlled energy sector. The measure, if passed, could boost production, especially if drillers begin tapping the country's deepwater and shale reserves. Schlumberger already offers some consulting services in Mexico and stands to benefit from increased activity in the country.

Conclusion

Schlumberger generated $2.35 billion in free cash flow over the last 12 months, versus a negative $590 million one year earlier. Management has raised the quarterly dividend at least 10% in each of the past three years after holding it steady during the financial crisis. The payout ratio remains below 30%, allowing Schlumberger flexibility to keep growing the dividend. Earlier this year, the company announced plans to repurchase up to $10 billion of shares by June 2018.

At 19 times trailing earnings and 2.5 times sales, shares trade 16% and 18% below their three-year averages. An annual report for Schlumberger Limited is available at 5599 San Felipe, 17th Floor; Houston TX 77056; (713) 375-3400; www.slb.com.

SCHLUMBERGER
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '13
1.15
vs.
1.03
8%
77.84
-
69.08
19 - 17
Mar '13
1.01
vs.
0.96
8%
82.00
-
70.12
20 - 17
Dec '12
1.02
vs.
1.05
8%
75.70
-
66.85
18 - 16
Sep '12
1.06
vs.
0.96
11%
78.47
-
64.19
20 - 16
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
42.15
4.06
1.08
80.78
-
59.12
20 - 15
2011
39.54
3.51
0.96
95.64
-
54.79
27 - 16
2010
27.45
2.70
0.84
84.11
-
51.67
31 - 19
2009
22.70
2.59
0.84
71.10
-
35.05
27 - 14
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
94
91
69
83
67
89
51

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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