Buybacks Support These Oil Services Stocks

Share repurchases do more than support shares of a company on the open market. They also reflect the company's confidence in its business and cash flows. Oil services companies like Schlumberger (NYSE: SLB  ) , Halliburton (NYSE: HAL  ) , and Baker Hughes (NYSE: BHI  ) were active in repurchasing their shares in 2013. Recently, all three have outperformed the S&P 500. Will this trend continue in 2014?

Companies will continue to buy back their stock
Back in July 2013, Schlumberger approved a $10 billion share repurchase program which will be completed at the latest by June 30, 2018. However, given the fact that the company spent $1.1 billion on stock repurchases in the fourth quarter alone, this program will be finished way before the announced date.

Halliburton repurchased $4.4 billion worth of shares last year, leaving $1.7 billion for future repurchases; Baker Hughes had $1.65 billion left in its buyback program at the end of 2013.

Oil services companies continue to prefer buyback programs to dividend increases. However, Schlumberger did recently increase its dividend by 28%, bringing the yield to 1.80%. Baker Hughes' and Halliburton's dividends are more modest, with respective yields of 1.00% and 1.10%.

Growth in international markets supports cash flows
Baker Hughes stated that it expects the international rig count to grow by 10% in 2014. First data released this year showed that this prediction is likely to be fulfilled. The latest Baker Hughes International Rig Count revealed that the number of rigs increased by 186, or 3.4%, in January compared to December.

At the same time, the North American rig count was down by seven rigs. This data is also in line with companies' predictions. Schlumberger stated that it expects capital investment levels to grow around 6% in 2014. According to Schlumberger, North American growth will be below this level and international growth will be above this level. What's more, the company stated that North America's land market continued to see downward pricing pressure in most product lines.

Despite the relative weakness in the North American market, these oil service companies were able to demonstrate meaningful revenue growth quarter after quarter in 2013 due to their success in international markets.

The fact that capital expenditures will remain in line with previous year's levels also contributes to free cash flow growth expectations. Schlumberger decided to cut its capital spending from $3.9 billion in 2013 to $3.8 billion in 2014.

Nevertheless, the company stated that it is going to continue to grow while holding spending down due to efficiency improvements. Halliburton's capital budget for 2014 is $3 billion, while Baker Hughes plans $2 billion in capital spending. Both figures are roughly in line with the previous year's numbers and reflect the companies' desire to hold their spending levels.

Bottom line
While I don't expect stellar growth from shares of oil services companies, their positions are solid. The international market continues to grow and outweighs the slowdown and pricing pressure on the domestic front. Companies' cash flows look solid and provide the foundation for existing and future buyback programs. The dividend yields are not spectacular, but there is some room for improvement if the market growth outpaces expectations.

The best play on oil services?
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

 


Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 18, 2014, at 11:21 PM, JAVKO wrote:

    Isn't it ironic that drillers are punished because analysts keep telling the public that the rig count is going down, while oil service companies are rewarded because the same analysts tell the same public that the rig count is going up??

    Are we talking about the same rig count?

Add your comment.

DocumentId: 2842516, ~/Articles/ArticleHandler.aspx, 4/17/2014 8:28:46 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 2.54 0.14%
NASD 4,095.52 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

4/17/2014 4:00 PM
BHI $68.33 Up +2.02 +3.05%
Baker Hughes, Inc. CAPS Rating: ****
HAL $60.90 Up +0.40 +0.66%
Halliburton CAPS Rating: *****
SLB $99.91 Down -1.03 -1.02%
Schlumberger CAPS Rating: *****

Advertisement