Schlumberger: The Oil Sector's Energy Boost
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I often get asked by readers, “If you think a stock is so great, why don’t you own it?” This is a fair question, and Schlumberger (NYSE: SLB) often falls within that description. While the volatility of the energy sector has served as a detractor, I’ve been nonetheless impressed by Schlumberger’s consistent performance.
Granted, Schlumberger’s P/E of 18 versus Halliburton’s (NYSE: HAL) ratio of 11 is a strong premium to carry. However, in terms of profits, there’s no comparison. And despite lingering concerns about the strength of drilling cycles, Schlumberger’s Q4 performance, which beat both top and bottom line estimates, served to create more separation between itself and the rest of the sector.
The Quarter That Was
For the quarter, revenue advanced 5% sequentially coming in at $11.17 billion. This was enough to top last year’s mark by 1.46% and beat Street estimates of $10.82. Net income arrived at $1.08 per share, also topping Street estimates by 1 penny.
Oilfield Services revenue arrived at $11.17 billion. This represents an increase of 8% year-over-year while advancing 5% sequentially. Likewise, operating income grew 1% sequentially to $2.2 billion, which was flat year-over year. Then again, at $1.44 billion, income from continuing operations was a little soft. Not only was it flat sequentially, it represented a 3% year-over-year decline.
However, it’s worth noting here that in Halliburton’s Q3 report, income from continuing operations dropped by 18% sequentially. Likewise, when compared to Baker Hughes’ (NYSE: BHI) third quarter, during which income from continuing operations declined year-over-year by 42% and by 30% sequentially, it is clear that it is a sector issue.
In the case of Schlumberger, while its 3% decline is disappointing, it's best to reserve judgment and wait on Halliburton’s Q4 report, which is due out on Jan. 25. At that point we can fairly assess what this metric actually means. In the meantime, the bigger picture remains clear. The performance is nonetheless solid.
For the full-year 2012, the company posted revenue of $42.15 billion versus $36.96 billion in 2011. Income from continuing operations (excluding charges and credits) arrived at $5.58 billion. This represents a 15% year-over-year increase in diluted earnings-per-share of $4.17 versus $3.61 in 2011. For the strong performance, CEO, Paal Kibsgaard offered:
“We capped the year with revenues of over $42 billion, up by 14%, with the International Areas growing by $4 billion, or 16%, their strongest growth by far since 2008. International grew from robust exploration and development activity, both offshore and in key land markets. In North America, we demonstrated our resiliency from the challenges of the land markets by growing the business by more than $1 billion, or 9%, aided by our strong position in the offshore market, particularly in the US Gulf of Mexico."
The Company’s Strength Is Powering It Forward
Kibsgaard touched on the company’s main strength, which is its international exposure. That two-thirds of Schlumberger’s revenue come from outside of the U.S. means that the company is well diversified. This allows Schlumberger to effectively maneuver through any weakness presented in North American by pressure pumping – causing an excess in supply.
Rivals such as Halliburton and Baker Hughes don’t share this advantage. For instance, sluggish activity in core North American operations was the primary reason that Halliburton’s adjusted profit for Q3 arrived much lower than expected.
Plus, the unfortunate timing of Hurricane Isaac didn’t help matters. Conversely, if Halliburton had Schlumberger’s international strength, these events could have been offset. However, in the case of Baker Hughes, the good news is that the company is not doing all that poorly in North America.
Revenue rose in the region by 1% year-over-year and 3% sequentially. Although international growth continues to disappoint, it did climb in Q3 by 3%. Then again, it dropped by 2% sequentially due to weakness in Latin America and Europe.
By contrast, of Schlumberger’s 14% increase in full-year pretax operating income, 31% of that growth came from international markets, which lead to international margin expansion of 226 basis points. What’s more, that it reached 20.5% was enough to outpace North American margins by 20 basis points. Essentially, when it comes to international growth, Schlumberger is the only true option.
The company is clearly operating on all cylinders is still “pumping out” one good quarter after the next. As expected, management has not taken this as a cue to rest on its laurels. Instead, the company is pushing heavily in subsea areas to position itself as a leader in global shale exploration. Then again, I do worry that at some point competition will begin to apply pricing pressure -- they have to in order to survive.
However, as management said during the call, Schlumberger is prepared. The company has begun to address key growth markets and has previously laid out steps which includes growing market share in various oil service lines, growing EPS faster than revenue, establishing the highest margins in North America while continuing its strong share buyback and dividend policy. As I said in the opening, I love the company -- I just wish I had the cash to buy the stock.
rsaintvilus has no positions in and of the other stocks mentioned above.