Good News Abounds for This Oilfield Service Company

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Schlumberger (NYSE: SLB) has been in the news recently for many good reasons. The company announced its Q4 earnings results on Jan 18 with net profit of $1.36 billion, translating to Earnings per Share of $1.02. Even though the result is below previous Q4 net profit of $1.41 billion or EPS of $1.05, it still matches with market expectations and the revenue is above par with the consensus. The company's earnings from continuing operations, an important indicator of the health and future prospective of the business model, have also met consensus expectations conducted by FactSet. The company said in a statement that the reduced profits can be attributed to high mobilization and new project startup costs along with seasonal delays. The company was able to maintain its profits at a respectable level mainly due to increased drilling and exploration activity in Gulf of Mexico.

The stock of Schlumberger, along with most oil companies, has taken a jump after encouraging Q4 results came out. The stock rose by 4.3% on the week's last day trading and closed at $76.50, opening at $73.95. Recently the stock has shown a declining trend which is clear from its EMA data. The stock has only recently climbed above its short term 20-days EMA and long term 50-days EMA from the beginning of January, and had previously traded below these standards for most of December. Recently, market analysis firm RBC Capital has given the stock an outperform rating with a target price of $85.

In my opinion, there is still some potential left in the stock to move upwards due to its previous undervaluation and also due to better than expected Q4 results of competing energy companies such as Baker Hughes and Halliburton Co whose shares rose by 3.7% and 3.3%, respectively.

Near term prospects

Schlumberger's CEO in his recent conference call has emphasized the possibility that there will be a rise in the number of operational rigs in 2013, although he has cautioned that the rise may not be as much was it was in 2012. The better prospects for the company lie in the probable increase of number of wells to be drilled this year which will mean faster growth in revenue and profit. Also, with Schlumberger's unique expertise in shale gas drilling, it is in a better position to take advantage of growing Shale gas exploration opportunities in China. Schlumberger has been able to revive its business in its biggest market, North America, where it posted a healthy growth of 3.1% in revenue over the previous year. Also the company is successfully increasing its footprints in developing markets such as Asia & South America with growth of 9.6% and 11% respectively.

Cautionary note

As we noted in the conference call, the company's management is cautious about the rise in the number of operational rigs and that could translate into investors becoming wary of the stock in the near future. Another area of concern is the reducing operating margin which has shown a decreasing trend in the recent past due to high merger and integration costs, and it fell to 16.2% from 18.2% a year ago.

Barclays Capital has recently said that they are bullish on oilfield drilling company stocks mainly due to favorable oil prices which are slated to rise even further, riding on supply constraints. They have maintained a short term target of $107 for Schlumberger and $63 for Halliburton, a competing firm in the same domain.

Given the above, I feel that the company fundamentals are strong enough to overcome these short term obstacles, and drive its business towards growth in short to medium-long term.

Competition Scenario

Baker Hughes (NYSE: BHI): The Company announced its Q4 earnings for 2012 on Jan 23, with a net profit of $214 million or EPS of 49 cents per share. This result shows a sharp reduction in profit by 32% as compared to last quarter. The main reasons for reduced profit are a sharp reduction in activities in North America and unfavorable prices of pressure pumps manufactured by the company. These conditions are expected to drag the profits down in 2013 as well.

Halliburton (NYSE: HAL): Halliburton is slated to release its Q4 results for 2012 on Jan. 25. The forecasts depict a reduction in profit in line with the other 2 major oilfield services companies. The earnings may fall by as much as 39%, which may lead to selling pressure on energy stocks when markets open next week. Long term performance of the company will depend upon company’s expansion strategy in international especially Asian and Latin American Markets.

Trading pattern

The current PE ratio of the company is at 18.48, down from 20.32, showing the potential of a probable price adjustment, which opens a buying window for investors. The company recently announced an increase in quarterly dividend by 13.6% to 31.25 cents to increase shareholder returns. In my opinion, this move is going to boost shareholder's confidence in the stock and will help in creating a possible rally in the near future. Despite the positive outlook, the stock's movement can't be precisely predicted solely on earnings and need to be seen in conjunction with other factors such as oil prices and the overall performance of the US economy. The following graph shows the comparison between S&P 500 index and some energy stocks taken in our report for consideration.

 

Source: Nasdaq.com

Conclusion

Schlumberger seems to be a good stock to invest in with a medium to long term perspective. Energy stocks in general have been outperforming the index recently and the trend seems likely to continue given the high probability of oil price increases and an increased number of deep water projects. The recent quarterly result coupled with the future outlook is bound to have a positive impact on the stock if other factors remain the same. The energy industry remains one of the critical sectors to watch and Schlumberger, being the industry leader, is a stock worth owning.


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