This Oil & Gas Service Company Might Deliver a High Yield to Investors
Anh 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 appreciated significantly since the end of June, from around $71.60 per share to nearly $83.80 per share. With that gain, Schlumberger has now appreciated nearly 21% this year, a bit higher than the S&P 500’s return of 18.90%. The recent gain was due to its impressive second-quarter earnings and its big share buyback plan. Let’s take a closer look to see whether or not investors should buy Schlumberger’s shares at its current price.
Consistent cash generation with a conservative capital structure
Schlumberger, founded in 1926, is the global leader in technology and integrated project management in the oil & gas industry, operating in three main business segments: Reservoir Characterization, Drilling, and Production. Most of its revenue, $15.97 billion, or 37.9% of the total revenue, was generated from the Drilling segment. The Production segment ranked second with $14.87 billion in sales, while Reservoir Characterization contributed the least with $11.4 billion in 2012 revenue. Interestingly, the Reservoir Characterization segment enjoyed the highest operating margin, with the highest income before taxes of $3.2 billion.
What I like about Schlumberger is its consistent positive cash flow generation and a strong balance sheet. Operating cash flow has increased from $2.1 billion in 2003 to $6.8 billion in 2012, while the free cash flow rose from $1 billion to nearly $1.78 billion during the same period. Investors would feel safe with Schlumberger due to its conservative capital structure. As of June 2013, it had $37 billion in equity, more than $5.9 billion in cash and short-term investments, and only around $12 billion in total debt.
Possibility of a decent total yield
Since 2003, Schlumberger has also paid consistently growing dividends to shareholders. The dividend per share has risen from $0.38 per share in 2003 to $1.38 per share in 2012. Moreover, the company has also returned cash to shareholders via share repurchase activities. In the past five years, Schlumberger has spent as much as $7.8 billion to retire more than 105 million shares.
The company also expects to return much more cash to investors via its new share repurchase plan of $10 billion. At nearly $83.80 per share, Schlumberger is worth around $111 billion. The market values the company at 9.3 times its trailing EBITDA (earnings before interest, taxes, depreciation, and amortization). A new $10 billion will yield as much as 9% to investors. Including a 1.6% dividend yield, the total yield reaches 10.60%.
Schlumberger seems to deserve the highest valuation
Compared to its smaller peers, including Halliburton (NYSE: HAL) and Weatherford International (NYSE: WFT), Schlumberger is the most expensively valued. Halliburton is trading around $45.10 per share with a total market cap of more than $42 billion. The market values Halliburton at 7.9 times its trailing EBITDA. Halliburton has also returned decent cash to shareholders via dividends and share buyback activities.
Recently, the company increased its dividend by 39% and raised the repurchase authorization to $5 billion. At the current price, Halliburton yields 1.10% while the $5 billion share buyback would yield as much as 11.90%. Looking forward, David Lesar, the company’s Chairman and CEO, is targeting the international market as the main growth driver to offset the weak demand in North America.
Weatherford is trading at around $14.30 per share with a total market cap of nearly $11 billion. The market values Weatherford at 8.2 times its trailing EBITDA. Looking forward, the company expects to increase its spending in unconventional activities including tight oil, tight gas, shale, and oil sands, from 13% in 2003 to 39% in 2017, with a total spending amount of $137 billion in 2017. For full year 2013, Weatherford expects to spend around 8%-10% revenue while the top line is estimated to experience double-digit growth.
Schlumberger seems to deserve a higher valuation with its highest profitability. The company has delivered the highest return on invested capital at 11.60% while the return on invested capital of Halliburton and Weatherford are 9.07% and (4.97)%, respectively.
My Foolish take
With the positive outlook of the oil industry and expansion in the international markets, Schlumberger is set to deliver a decent return in the long run for patient investors. Moreover, investors could also get a decent total yield of as much as 10.6%, including dividend and a $10 billion potential share buyback.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!