Schlumberger Earnings Preview: Will They Justify the Lofty Expectations?
Matthew 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 range-bound for the past three years, mainly being stuck in the $60-80 price level. With the company set to report earnings next Friday, investors will be looking for signs that it is ready to take the next step and deliver growth for its shareholders.
Schlumberger is the leading provider of oilfield services to the energy industry. By market capitalization (around $96 billion), the company is several times larger than their main competitors Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI), at $34 billion and $19 billion, respectively. The company operates through three major segments. The Reservoir Characterization Group (25% of revenues) develops and implements technologies involved in the finding of hydrocarbon deposits. The Drilling segment (36% of revenues) includes geoservices, drill bits, measurements, and drilling tools. Finally, the Reservoir Production segment (32%) deals with well services and completions, undersea services, water and carbon services, and production activities.
There is a fourth segment, Distribution, however in April 2012 the company announced plans to sell it to National Oilwell Varco. The company currently reports the segment as a stand-alone business.
Schlumberger is very highly focused on international operations; with only 33% of revenues coming from North America. In addition, finding and development costs are generally lower in the Eastern Hemisphere, so I anticipate most new major oilfield developments will take place overseas. During the conference call, listen for any international plans, as they will be the major driver of growth going forward.
The company has done a good job of increasing shareholder returns, having consistently raised their dividend over the past decade from $0.38 per share in 2003 to $1.10 today, an average annual “raise” of 12.5%.
In terms of valuation, Schlumberger is pretty attractive right now, by their own historical averages as well as the projected rapid growth in operating margins (and therefore earnings) expected to occur over the next several years. The company currently trades at 17.6 times 2012’s earnings, a discount to their 5-year historical average of right around 20. When the company reports on Friday, the consensus calls for earnings of $4.19 for the year, up from $3.66 in 2011. Regardless of whether or not the company meets this expectation, the most important thing is going to be the forward outlook. Currently, Schlumberger is expected to grow its earnings to $4.82 in 2013 and $5.96 in 2014. This implies a 3-year average earnings growth rate of 17.7%, which would more than justify the company’s high historical multiples.
However, the fact that analysts expect this kind of earnings growth tells me that the market is skeptical. Companies that are projected to have high double-digit earnings growth generally do not trade at a discount to historic valuations, so I think that during the earnings call, investors will want to hear more concrete details of how the company plans to accomplish the growth that is projected. Any details on international projects or higher projected margins will be welcome news.
If the analysts are correct, and Schlumberger does indeed post the earnings numbers the consensus calls for, then the stock could indeed break out of its range and move significantly higher. Based on the historical P/E ratio average, and the 2013 earnings projections, a 1-year target price of $96.40 is completely reasonable. If the earnings call says the right things, it may be time to pull the trigger on Schlumberger.
KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Halliburton Company and National Oilwell Varco. The Motley Fool owns shares of Halliburton Company. 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!