Schlumberger greases the skids

5/12/2008


Schlumberger ($104; NYSE: SLB) performs an array of complex services for oil and natural-gas producers. You might say that in the oilfield, Schlumberger does it all.

To take advantage of rising oil and natural-gas prices, energy companies have increased spending on the discovery and development of new reserves. Even if energy prices decline, they should remain high enough to support continued strong spending. Schlumberger is well-positioned to profit from that spending through all phases of the production cycle.

The oilfield-services division can execute every task necessary to pump oil out of the ground, from planning the construction of wells to retrieving the oil in a field to capping off wells after the project is done. Schlumberger also sells software to monitor production and provides project-management services. The WesternGeco division maps oil reservoirs and helps develop and monitor fields. This breadth of services helps differentiate Schlumberger, a Long-Term Buy, from its rivals.

Worldwide revenue base
In the March quarter, earnings fell from December-quarter levels, the first time in nearly four years that profits didn’t improve sequentially. Quarterly earnings of $1.06 per share declined $0.05 from the December quarter but rose $0.10 from the year-earlier period. Most of the sequential profit decline stems from weakness at WesternGeco (13% of 2007 revenue), which has historically posted inconsistent results. WesternGeco sales fell 15% sequentially and 4% from a year ago.

Oilfield services (87% of 2007 sales) managed sequential revenue growth of 3% and year-over-year growth of 18% in the March quarter. While North American revenue rose 3% from year-earlier levels, the oilfield-services unit saw growth of at least 22% in its other three operating regions — Latin America, Europe and Africa, and Middle East and Asia.

Strong demand trends
While oil companies are spending more on production, those dollars don’t go as far as they once did. Producers depend increasingly on offshore fields, which are harder to find and more expensive to tap. Many are struggling to stem production declines at mature fields in North America and Europe.

At the same time, the growing global economy demands an ever-increasing amount of fuel. Billions of people in Asia, Latin America, and even Africa are in pursuit of first-world living standards, increasing the need for oil. That trend is unlikely to reverse.

This confluence of strong demand and constraints on supply suggest demand for Schlumberger’s services should remain robust.

Conclusion
Though March-quarter earnings lagged market expectations, Schlumberger shares are up nearly 9% since the announcement, helped by the company’s optimistic outlook on production spending.

At 20 times estimated year-ahead earnings, Schlumberger is not cheap relative to its peers, but trades at a slight discount to its five-year average forward P/E. The price seems reasonable for a market leader poised to share in what the company calls the strongest production push in 30 years. An annual report is available at 5599 San Felipe, 17th Floor; Houston, TX, 77056; (713) 375-3535; www.slb.com.


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