Schlumberger: A Solid Bet on the Future of Fossil Fuel
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The oil services sector contains some of what I consider among the best run companies in the stock market. It has been a disappointing few months for the group, which after posting terrific earnings in the second quarter, saw their share prices generally retreat due to the Street's focus on the future. I am not at all pessimistic about their future. As much as I believe that alternative, clean energy is a mandatory part of our future, I am also certain that oil and gas will have a major role in the world's near and intermediate term future. Today I am going to look at some of the larger oilfield service companies.
Schlumberger Limited (NYSE: SLB) is the largest oilfield services company in the world, with operations in 85 countries and a market capitalization of nearly $96 billion. But what separates Schlumberger from the other companies in this article is that not only does it have its presence scattered around the world, it also has its business equally scattered; in full year 2011, 69% of the company's revenues were obtained outside of North America.
Schlumberger had a terrific second quarter. Early in the quarter Schlumberger sold its modest midstream assets. In 2011 midstream revenue accounted for 3% of revenue and 1% of profits. All numbers comparisons will pertain to oilfield services results only, as now that comprises 100% of Schlumberger. Revenues of $10.45 beat the 2011 second quarter revenues of $8.99 billion by over 16%, due in part to including the acquired business of Smith International into the fold. Profits came to $1.38 billion, or $1.03 per share, compared with $1.11 billion, or $0.81 per share in the same quarter of last year. The company is nearing the end of its $8 billion share buyback plan first announced in 2008, and spent nearly $500 million buying its own stock in this second quarter.
Schlumberger beats its peers on two fronts. It spends over a billion dollars per year on research and development, and is the technology leader in its industry. Its geographic diversity allows it to invest its resources according to potential and need. A look at some of its recent deals shows the effect of that geographic scope. Schlumberger recently signed a $100 million deal to supply Royal Dutch Shell (RDS-A) affiliates with pumping equipment in Norway. Another deal was also reached, this time for $342 million, with the Norwegian State Oil company. Earlier in August, Schlumberger contracted with a unit of U.K based JKX Oil and Gas (JKX.L) for a hydraulic fracturing project in Ukraine.
I believe Schlumberger is a potential core holding for many investors who both believe in a fossil fuel future, and are not in need of a generous current income. Its very strong balance sheet should also attract conservative investors.
Probably my favorite company in this sector is the much smaller Oil States International (NYSE: OIS). This company divides itself into four groups: tubular services (39% of 2011 revenue), accommodations (25%), which provides temporary workforce facilities, well site services (19%) and offshore services (17%). In its second quarter of 2012, all four groups performed admirably enough for revenues to have increased 33% from the second quarter of 2011, to $1.09 billion. Profits came to $111 million, or $2.01 per share, about a 50% hike from the year ago's $74 million, or $1.34 per share.
Oil States is right on track to earn about $8 per share this year, and its per share earnings will be increasing due to its recently announced $200 million share buyback plan. The plan should retire about 2.5 million shares, or about 5% of the outstanding stock.
Oil States is on a tremendous growth track, and analysts forecast five year growth averaging nearly 40%. That has driven its 5 year PEG down to a microscopic 0.21. I see this as a value play, and encourage those interested in capital growth over the next 1 – 3 years to take a careful look at this emerging oilfield winner.
Transocean (NYSE: RIG) is the world's largest offshore drilling contractor, with operations in the Gulf of Mexico, North Sea, Brazilian Coast, and many similar areas around the world. It owns about 120 open water vehicles, about thirty of which are classified as “ultra deep” water rigs.
The issue for the past several years for Transocean, of course, has been its interest in the stricken well that led to the 2010 Gulf Oil disaster. There are signs that the last stages of big time litigation are nearing an end. At the close of the second quarter, the company had about $2 billion set aside to cover future losses. Of course, there is no guarantee that will be enough, but the fundamental business seems to be on an upswing. One key measurement is average rental prices, and Transocean is receiving an average $650,000 per day for its deepwater rigs. The company's operating margins still remain in the middle 30% range, far below the 55% to 60% that was typical in the in the 2005 to 2008 period, so there is room for improvement there.
There is an offshore drilling boom at present, especially in Brazil. As much as the country would like to “insource” all aspects of that offshore drilling, it lacks the infrastructure at this time, suggesting a promising revenue source for Transocean for the next few years. Earnings this year are expected to come to about $970 million, or $2.80 per share, which would more than double last year's earnings. But that is subject to adjustment based on litigation. To me, there are a few too many unknowns in Transocean's near to intermediate time frame, especially considering that more predictable and stable options exist, and I would avoid this company.
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