Schlumberger Has Strength To Thrive

3/16/2009


 

  Recent Price
$40
  Dividend
$0.84
  Yield

2.1%

  P/E Ratio
9
  Shares (millions)
1,210
  Long-Term Debt as % of Capital
18%
  52-Week Price Range
$111.95 - $35.05

Over the last decade, Schlumberger ($40; SLB) has penetrated almost every step of the energy supply chain. The company helps customers shorten drilling time and increase well production, providing technology that allows smaller companies to better compete with larger rivals. Operating in 80 countries, Schlumberger generated about three-fourths of sales outside of North America.

Sales jumped 17% last year, climbing 10% in the December quarter despite an industrywide slowdown. A robust balance sheet should help Schlumberger through a rough 2009 for which the consensus projects per-share profits will fall 35%. The strengthening dollar and weakening shallow-water drilling activity will likely pressure Schlumberger’s results. But the deepwater segment’s resilience could help Schlumberger, a Long-Term Buy, exceed the depressed consensus profit estimate.

Business breakdown
Oilfield services (90% of 2008 revenue) managed sales growth of 15% in the December quarter and 20% for the year. The segment operates a broad range of businesses, of which three have particularly strong growth potential: The wireline unit evaluates reservoirs and monitors production; well services builds oil and gas wells; and the drilling and measurements segment helps customers better steer their drilling toward the target.

WesternGeco (10% of 2008 revenue) takes seismic surveys of reservoirs. Sales declined 4% in 2008, but the segment’s record backlog of $1.77 billion, up 51% last year, should keep Schlumberger busy for most of the next two years.

National oil companies, such as Brazil’s Petrobras ($29; PBR), represent Schlumberger’s fastest-growing revenue stream, in part because their spending is relatively insensitive to the economy. Multinational oil companies account for roughly a quarter of Schlumberger’s income, a percentage that should rise as the service provider moves aggressively into the deepwater market.

The outlook for oil, like pretty much everything else, has turned gloomier in the past few months. Schlumberger expects exploration activity to decline in 2009, and the company may have to cut prices to win new business.

Customers are reacting to the economic slowdown much faster than they have in the past, although the company says national oil companies and the largest multinationals are unlikely to risk their long-term positions by canceling contracts. North America, Russia, and the North Sea could face the sharpest spending cutbacks.

Conclusion
Schlumberger’s robust balance sheet could help the company improve its position as weaker rivals stagger. At the end of December, the company held cash reserves of $3.69 billion — roughly equal to long-term debt — and had $1.8 billion of additional credit available. Operating cash flow should provide enough liquidity to fund niche acquisitions and maintain spending on research and development without further borrowing.

Shares trade at nine times trailing earnings, a 67% discount to the five-year average. An annual report for Schlumberger Limited is available at 5599 San Felipe St., 17th Floor; Houston, TX, 77056; (713) 375-3535; www.slb.com.

SCHLUMBERGER
 
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Dec '08 $0.95 vs. $1.11 + 10% $78.00 -

$37.07

17 - 8
Sep '08 1.25 vs. 1.09 + 22% 111.95 - 73.53 25 - 17
Jun '08 1.16 vs. 1.02 + 20% 110.11 - 85.72 26 - 20
Mar '08 1.06 vs.

0.96

+ 15% 102.71 - 72.30 25 - 17
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $27.16 $4.42 $0.81 $111.95
-
$37.07 25 - 8
2007 $23.28 $4.18 $0.70 114.84
-
55.68 27 - 13
2006 $19.23 $3.04 $0.48 74.75
-
49.20 25 - 16
2005 $14.31 $1.67 $0.40 51.49
-
31.57 31 - 19
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
88 67 57 97 90 55 49

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


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