Schlumberger’s Superior Technology Continues to Help Improve Margins

Schlumberger is the undisputed global leader in oilfield services.

Apr 22, 2014 at 10:11AM

Schlumberger (NYSE:SLB) remains the global leader in oilfield services despite strong competition from its large-cap diversified peers Halliburton (NYSE:HAL), Baker Hughes (NYSE:BHI), and Weatherford International (NYSE:WFT). The company's sheer size combined with its superior technology offerings put the company at a greater competitive advantage today than at any point in its entire history. The company remains the best positioned stock in the oil and gas equipment and services industry, and its execution continues to be best in class.

The company reported adjusted 1Q14 operating EPS of $1.21, slightly higher than the consensus sell-side estimates of $1.20. Total revenues of $11.2 billion decreased 6% quarter over quarter but were up 5% year over year. While currency devaluation affected international results, which in turn affected revenues slightly, the company has natural foreign exchange hedges that protect its margins, and as such margins were in line. Moreover, non-recurrence of year-end product sales, weather, and seasonality also added to sequential revenue declines, but these factors are unlikely to impact results for the rest of 2014.

Technology driving North American improvement
All geographic regions except North America posted increased margins. While the continued pricing competition in pressure pumping affected North American margins, there is a positive change in the company's language around the pricing environment. Despite weather disruptions, Schlumberger reported strong underlying improvement in U.S. land revenues. The company managed to increase North American revenues 1% Q/Q driven by service intensity, market share gains, new technology, and growing artificial lift business.

Outlook remains positive
In addition to North America, Schlumberger is also seeing some technology-driven price increases in the international market. With the recent megatender win, which should impact 2H14 revenues, the company's visibility in Mexico is increasing as well. The company remains optimistic in its outlook for 2014 and expects customer well-related spend to increase more than 6%, evenly split between international and North American markets. Previous guidance was more weighted toward international. Finally, the natural gas supply/demand dynamics are also expected to normalize following a cold winter.

Accelerated buy-backs and likely dividend increase
The company announced acceleration of its $10 billion buyback program announced last year. Instead of previous plans to complete it in five years, Schlumberger now plans to complete it in 2.5 years. In addition to the $2.6 billion shares repurchased last year, the company bought back $900 million of its shares in the first quarter of 2014. The company's intention to complete the program in 2.5 years instead of five years more or less formalizes what Schlumberger was already doing in the recent quarters. This announcement is a further confirmation of the company's confidence in the sustainability of the current global spending up-cycle. Schlumberger will also address an increase in its dividend at the company's board meeting in early 2015. Taking into account the company's financial health, its robust free cash flow generation, and confidence in its outlook, it is very likely that the company will increase its dividend.

Schlumberger's strong execution compared to the group, its leverage to deepwater and international markets, its strong cash flow generation capacity, and its industry-leading technology portfolio warrants premium valuation. However, shares are trading at a relatively narrow premium compared to the historical average and present a good entry point. Schlumberger is trading at a forward price/earnings ratio of 14.8, compared to 12.3 of Halliburton and 12.2 of Weatherford. Schlumberger also offers a higher free cash flow yield of 4.4% compared to 3.7%, 2.9%, and -2.5% of Baker Hughes, Halliburton, and Weatherford respectively.

Bottom line
Schlumberger is firing on all cylinders. Despite an operating environment with little pricing power for anyone in the industry, the company continues to improve margins through efficiencies and technology. Schlumberger is the best positioned stock in the oil services group, and its execution remains best in class. Its large size and superior technological offerings put the company at a greater competitive advantage compared to its peers. Finally, the announcement of the accelerated buyback program combined with the 28% increase in annual dividends announced previously makes Schlumberger stand out in shareholder capital allocation.

OPEC is absolutely terrified of this game-changer
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!


Jan-e- Alam has no position in any stocks mentioned. The Motley Fool recommends Halliburton. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information