Oil services has been a dynamite sector over the last year, and leading company Schlumberger has not disappointed its shareholders, ringing up strong performances. This company is also making moves to corner the smart card market, signing a deal with WAP provider Openwave and bidding to purchase the assets of rival manufacturer Bull.

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By Bill Mann (TMF Otter)
January 22, 2001

With the demise of Harnischfeger into Chapter 11 and the merger of Hoechst Celanese into Aventis (NYSE: AVE), Schlumberger (NYSE: SLB) assumes the title of "Most Difficult to Pronounce Name" on the New York Stock Exchange. Despite the tongue-twisting, "Schlumerzhay's" lead seems insurmountable.

Schlumberger, a FOOL 50 component, reported its fourth-quarter and full year earnings late last week, which surged significantly over last year's numbers. Part of this, no doubt, is due to Schlumberger's participation in the oil and gas services business, which has seen significant growth in both demand and price in the last 18 months.

Such growth has led to a sudden surge in exploration and production (E&P) demand, which had been depressed due to low prices and industry consolidation. But now that oil and gas prices seem more likely to sustain recent increases, oil companies are clamoring to bring more to market, providing rich pickings for Schlumberger.

At the same time, Schlumberger has done a good job in keeping its cost structure in check: A 15.6% rise in annual revenues corresponds nicely with an earnings growth of 101%. More importantly, in spite of an increase in capital expenditures of more than 50%, Schlumberger attained a 15% higher percentage of free cash flow. This means the company has been able to reinvest more money into the future growth of the business -- and still have a higher amount of cash available to return to its shareholders should it so choose.

Schlumberger is a difficult company to categorize. It is an oil exploration services company, yet it owns no oil fields. Rather, it provides information technology to help the exploring companies to bring new fields online, and to optimize production from older fields. It is not a utility company, yet it has significant activities in metering technology, including remote meter-reading. And finally, Schlumberger seems to have expanded its lead in the "smart card" technology sector, providing security to credit card, cellular, and transportation companies, among others.

Schlumberger is seeking to expand in this latter market, offering to buy troubled French technology company Bull's smart card business. Luxembourg-based Gemplus (Nasdaq: GEMP), another leading producer, declined to bid for Bull's asset allowing Schlumberger to emerge as the only bidder, a significant setback for the less-diverse Gemplus.

Schlumberger's recent mobile commerce security deal with Openwave (Nasdaq: OPWV) received very little fanfare but will allow integration between Schlumberger's wireless identification modules into Openwave's dominant wireless browser suite. Although neither of these developments had a material effect on Schlumberger's earnings, they both show promise for further development.

There are a few small warning signs for investors, notably an increase in share count of more than 3%, a decrease in cash, and an increase in debt, receivables, and inventory. Those things could be explained simply by the ebb and flow of business, but may also signify a deteriorating balance sheet. Still, these are mere nitpicks, as Schlumberger provided its shareholders with dynamite performance throughout 2000.

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