American Oilfield Services Firms Look Abroad for Growth

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The world’s top three oilfield services firms, Schlumberger (NYSE: SLB), Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI), have all released their quarterly results. The three witnessed a challenging environment in the North American market due to lackluster activity and low natural gas prices. Schlumberger, the biggest of the three earns just 32% of its revenues from North America, while Halliburton receives 56% and Baker Hughes 51% of their total annual revenues from this market.

<table> <tbody> <tr> <td> <p><strong> Regions</strong></p> </td> <td> <p><strong>SLB Rev %</strong></p> </td> <td> <p><strong>HAL Rev %</strong></p> </td> <td> <p><strong>BHI Rev %</strong></p> </td> </tr> <tr> <td> <p><strong>North America</strong></p> </td> <td> <p>31.99%</p> </td> <td> <p>56.15%</p> </td> <td> <p>51.78%</p> </td> </tr> <tr> <td> <p><strong>Latin America</strong></p> </td> <td> <p>17.92%</p> </td> <td> <p>12.96%</p> </td> <td> <p>11.46%</p> </td> </tr> <tr> <td> <p><strong>Europe/Africa/CIS</strong></p> </td> <td> <p>27.15%</p> </td> <td> <p>15.82%</p> </td> <td> <p>17.36%</p> </td> </tr> <tr> <td> <p><strong>Middle East/Asia</strong></p> </td> <td> <p>21.81%</p> </td> <td> <p>15.07%</p> </td> <td> <p>15.65%</p> </td> </tr> </tbody> </table>

Baker Hughes, the smallest of the three, was the only one to report a fall in both revenues and earnings. Both Schlumberger and Halliburton have posted increasing revenues, coming largely from outside of North America. 

Schlumberger

Schlumberger, unlike the other two, is truly a global leader and has the technological prowess which will make sure it retains its leadership in the long run. It has reported a rise in revenues from $10.30 billion last year (up 8.4%) and $10.61 billion in the previous quarter (up 5.3%) to $11.17 billion, which was considerably more than analysts’ estimates of $10.82 billion. The growth has come on the back of strong international deep water operations; however, project delays and a seasonal slowdown in activity have caused a 3.6% drop in net income from last year to $1.36 billion.

Halliburton

Halliburton also posted similar results to Schlumberger, a decrease in profits but an increase in revenues, albeit the fall was far greater and the increase in revenues was much smaller as compared to Schlumberger. The company’s revenues climbed by a more modest 3.3% to $7.29 billion, while its net income fell by 26.2% to $669 million or $0.72 per share. Analysts were expecting earnings of $0.61 per share. Despite the company’s heavy exposure to North America, a region where drilling activity was down in Q4-2012, Halliburton’s revenues still increased due to strong performances from Middle East/Asia and Latin America regions.

Baker Hughes

Baker Hughes’s revenues dropped by 1.51% to $5.22 billion while its net income fell by 31.8% to $214 million or $0.48 per share, excluding the $0.01 per share income from discontinued operations. However, the company incurred a provision for bad debts related to Latin America in this period of $0.14 per share. Excluding those, the net income rose to $0.62 per share, which was a 13.9% decline from last year and one cent above analysts’ estimate.

In the last six months, Halliburton’s stock has risen by almost 27%, easily outperforming both of its rivals, and its stock is trading just 50 cents below its 52-week high levels, but its P/E is still more than 4 points below that of Schlumberger. The company made considerable improvements in the fourth quarter, has beaten both top and bottom-line estimates and earned a record quarterly revenues. The biggest positive in its earnings release was that revenue growth in international markets offset the falling levels in North America; this is something that is common with Schlumberger rather than Halliburton.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Schlumberger</strong></p> </td> <td> <p><strong>Halliburton</strong></p> </td> <td> <p><strong>Baker Hughes</strong></p> </td> </tr> <tr> <td> <p><strong>Stock 6M (through 2/22)</strong></p> </td> <td> <p><strong>+12.5%</strong></p> </td> <td> <p><strong>+27.2%</strong></p> </td> <td> <p><strong>+1.7%</strong></p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>19.5</p> </td> <td> <p>15.1</p> </td> <td> <p>15.7</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>4.1</p> </td> <td> <p>2.84</p> </td> <td> <p>2.97</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>1.7%</p> </td> <td> <p>0.8%</p> </td> <td> <p>1.3%</p> </td> </tr> <tr> <td> <p><strong>Profit Margin (ttm)</strong></p> </td> <td> <p>13.0%</p> </td> <td> <p>9.2%</p> </td> <td> <p>6.1%</p> </td> </tr> <tr> <td> <p><strong>Operating Maring (ttm)</strong></p> </td> <td> <p>17.8%</p> </td> <td> <p>15.6%</p> </td> <td> <p>10.6%</p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> <p>8.0%</p> </td> <td> <p>10.9%</p> </td> <td> <p>5.5%</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p>16.5%</p> </td> <td> <p>17.8%</p> </td> <td> <p>7.9%<span> </span></p> </td> </tr> </tbody> </table>

While Halliburton is going in the right direction, it still has a long way to go. Moreover, Schlumberger isn’t sitting idle. The market leader earned more than $1.3 billion in 2012 operating income in each of its markets; Halliburton’s largest operating income outside of North America came from Middle East/Asia region where it netted $687 million, $1.46 billion less than Schlumberger’s earnings from the same market.

<table> <tbody> <tr> <td colspan="4"> <p><strong>Halliburton Operating Income 2012 (US$M)</strong></p> </td> </tr> <tr> <td> <p><strong>Regions</strong></p> </td> <td> <p>2,011</p> </td> <td> <p>2012</p> </td> <td> <p>% Change</p> </td> </tr> <tr> <td> <p><strong>North America</strong></p> </td> <td> <p>3,982</p> </td> <td> <p>2,940</p> </td> <td> <p>-26.17%</p> </td> </tr> <tr> <td> <p><strong>Latin America</strong></p> </td> <td> <p>464</p> </td> <td> <p>599</p> </td> <td> <p>29.09%</p> </td> </tr> <tr> <td> <p><strong>Europe/Africa/CIS</strong></p> </td> <td> <p>239</p> </td> <td> <p>593</p> </td> <td> <p>148.12%</p> </td> </tr> <tr> <td> <p><strong>Middle East/Asia</strong></p> </td> <td> <p>451</p> </td> <td> <p>687</p> </td> <td> <p>52.33%</p> </td> </tr> </tbody> </table>

 

<table> <tbody> <tr> <td colspan="4"> <p><strong>Schlumberger Operating Income US$M</strong></p> </td> </tr> <tr> <td> <p><strong>Regions</strong></p> </td> <td> <p>2,011</p> </td> <td> <p>2012</p> </td> <td> <p>% Change</p> </td> </tr> <tr> <td> <p><strong>North America</strong></p> </td> <td> <p>3,052</p> </td> <td> <p>2,736</p> </td> <td> <p>-10.35%</p> </td> </tr> <tr> <td> <p><strong>Latin America</strong></p> </td> <td> <p>1,074</p> </td> <td> <p>1,387</p> </td> <td> <p>29.14%</p> </td> </tr> <tr> <td> <p><strong>Europe/Africa/CIS</strong></p> </td> <td> <p>1,477</p> </td> <td> <p>2,245</p> </td> <td> <p>52.00%</p> </td> </tr> <tr> <td> <p><strong>Middle East/Asia</strong></p> </td> <td> <p>1,874</p> </td> <td> <p>2,152</p> </td> <td> <p>14.83%<span> </span></p> </td> </tr> </tbody> </table>

Even given the difficulties encountered in the fourth quarter, I prefer Schlumberger’s balanced regional revenues and operating income over Halliburton’s.  Baker-Hughes is still working through identity issues I highlighted in a previous article, and for those organizational and management reasons I cannot be bullish on the company at this point. Supply in North America looks to be high for the next 18 months as the futures market is not signaling any delivery issues through the end of the year. Long term, the international market for natural gas and oil will be well-bid and drive the margins. In that scenario, while Haliburton is improving its foreign portfolio, I’d prefer to hold Schlumberger if demand in North America improves.

 


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