The Best Buy in Oil and Gas Exploration

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

I don’t get it! Why do people believe that crude prices are still falling? Yes, crude fell from yearly highs of $128 to below $90, but the commodity has recovered by nearly 26% since the lows it hit in June. This translates into increased profit margins for crude exploration and development companies like Schlumberger Limited (NYSE: SLB). Keeping in the mind the recent economic events around the globe, I believe that the price of crude oil is still heading north, which makes me bullish on Schlumberger Limited.

Schlumberger is a technology and services provider to the oil and gas exploration industry. The wide range of services provided by the company include exploring and evaluating hydrocarbon deposits, drilling and positioning of oil and gas wells, along with maintaining and managing production levels from the hydrocarbon wells. It is obvious that an increase in oil and gas prices would entice oil companies to ramp up their production levels, which brings Schlumberger in business.

<img src="/media/images/user_13723/brent_large.JPG" />

(1 year Brent Crude Chart)

The recent past has seen the light of many stimulus packages around the globe. Governments have been giving their economies injections of liquidities, which are expected to push up oil prices. However, the looming nuclear problems with Iran has further strained oil supply.

<img src="/media/images/user_13723/natural-gas_1_large.JPG" />

(1 year Natural Gas Chart)

Natural gas also seems to be following the trend. The boom in natural gas production due to technological advancements had created an oversupply in the market, and because of this natural gas prices remained under pressure. But looking at the charts, we can see that natural gas prices have risen nearly 70% from the lows of this year. However, this boom in production was seen in the US alone. In the US, the price of natural gas is hovering around $3.20, whereas in the Asian countries natural gas costs nearly $13 per 10,000 MMBtu. This suggests that Asian countries still need to explore for natural gas wells, which would again bring the global giant Schlumberger some profits.

In its recent results the company reported revenues of $10.45 billion, which were up 16.7% compared to same quarter a year ago. Operating income stood at $2.1 billion, which was up 20% compared to the same period last year. EPS saw a 27% increase, which beat the market expectations by 5%. EPS stood at $1.05 compared to the $0.86 Schlumberger made the same quarter a year ago.

The company shares its market space with Halliburton Company (NYSE: HAL), SeaDrill (NYSE: SDRL) and Linn Energy (NASDAQ: LINE).

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Debt/Equity</p> </td> <td> <p>EXPS growth expected next yr.</p> </td> <td> <p>Retained Earnings</p> </td> </tr> <tr> <td> <p>Schlumberger</p> </td> <td> <p>32%</p> </td> <td> <p>19%</p> </td> <td> <p>74%</p> </td> </tr> <tr> <td> <p>Halliburton</p> </td> <td> <p>33%</p> </td> <td> <p>9%</p> </td> <td> <p>89%</p> </td> </tr> <tr> <td> <p>SeaDrill</p> </td> <td> <p>145%</p> </td> <td> <p>43%</p> </td> <td> <p>39%</p> </td> </tr> <tr> <td> <p>Linn Energy</p> </td> <td> <p>170%</p> </td> <td> <p>14.8%</p> </td> <td> <p>-64%</p> </td> </tr> </tbody> </table>

The financial metrics suggest that Schlumberger has the healthiest fundamentals ,with the lowest debt/equity ratio and second-best retained earnings. Analysts expect the EPS growth over the next year to be around 19%, and around 16% for the next 5 years.

In my opinion, oil and natural gas are on an upswing. This would encourage oil companies around the globe to explore for new oil wells. As far as natural gas is concerned, Asian countries would be looking to explore natural gas rigs, presenting tremendous growth opportunities for Schlumberger, as it has its presence in more than 85 countries around the globe. For these reasons I believe Schlumberger will see a sustained upside in the coming future.

Interested in Additional Analysis?

For more information on The Motley Fool’s energy stock, Seadrill, check out our premium report on the stock. It gives background on the company and highlights the three areas investors must watch. It also comes with a year of updates on the company, so find out more by clicking her

 


PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company and Seadrill, Ltd. Motley Fool newsletter services recommend Halliburton Company and Seadrill, Ltd.. 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.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus