Is This Oilfield Services Company a Good Stock to Buy?
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Schlumberger (NYSE: SLB), the largest publicly traded U.S. oilfield services company by market capitalization (at $110 billion), recently reported its results for the second quarter of 2013. The company saw an 8% increase in revenue versus a year earlier, which was in line with the growth of its business from Q1. It recorded a significant gain on the formation of a joint venture specializing in subsea oil and gas services; if the results are adjusted for that and for a significant impairment charge last quarter, then pre-tax income ends up rising 13% compared to the prior year period.
About half of the company’s cash flow from operations in the first half of the year has gone to capital expenditures, with most of the rest going to dividends and share repurchases.
Other concerns for investors
The stock currently trades at 18 times trailing earnings, as investors expect profits to continue to grow in the future -- possibly helped by the ongoing boom in oil and gas development in the onshore U.S., as well as continued triple-digit oil prices. Schlumberger’s buyback activities could also supplement earnings growth and generate steeper growth in earnings per share.
Wall Street analysts are expecting the company to earn $5.74 per share next year, making for a forward P/E of 14. It should be noted that the connection between drilling activity and oil prices, and therefore to the overall economy, results in Schlumberger carrying a beta of 1.8.
Who owns it?
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It turns out that billionaire Steve Cohen’s SAC Capital Advisors reported a position of 1.2 million shares in Schlumberger at the beginning of April (find Cohen's favorite stocks). Renaissance Technologies, founded by billionaire Jim Simons, was buying the stock in the first quarter of 2013 (see Renaissance's stock picks).
Comparing the company to its peers
The closest peer for Schlumberger is Halliburton (NYSE: HAL), considered a major player in the industry even though it is somewhat smaller with a market cap of $43 billion. Halliburton recently pleaded guilty to destroying evidence and settled with the Justice Department; with this uncertainty removed from the stock price, it rose 4% on the day. Earnings have recently been low for the company, and sales growth has been more limited than it has been for its larger peer.
However, the sell-side expects Halliburton to rebound and so, it trades at a small discount to Schlumberger on a forward earnings basis with a P/E of 11. Expectations for continued growth yield a five-year PEG ratio of 0.7, though it may be best to wait for the company’s actual results to improve before considering it as a value play.
Another peer in oilfield services is Weatherford International (NYSE: WFT). It is another company which has been struggling recently, going by recent reports, though as with Halliburton, analysts seem to expect that general improvements in the industry will strengthen its bottom line. Weatherford is valued at 11 times forward earnings estimates, even with Halliburton on that basis, and also posts a five-year PEG ratio below 1. As with that stock, it seems a bit risky to buy based entirely on the Street’s confidence in the 2014 numbers.
As a result, investors interested in oilfield services investments should probably start by looking at Schlumberger, at least for now, at least out of the companies which have been discussed here. Weatherford and Halliburton do feature lower forward P/Es, but in each case, the forward expectations incorporate a good deal of expected EPS growth next year from what are currently less appealing levels.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in HAL. 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!