Schlumberger’s Superior Technology Continues to Help Improve Margins

Schlumberger is the undisputed global leader in oilfield services.

Jan-e- Alam
Jan-e- Alam
Apr 22, 2014 at 10:11AM
Energy, Materials, and Utilities

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.