by Tom Taulli | July 20, 2012 1:33 pm
Oil services company Schlumberger (NYSE:SLB) posted a solid second-quarter earnings report. Profits increased by 21% to $1.05 a share, which was above the Wall Street estimate of $1.00 a share. Revenues were also up by 16% to $10.45 billion, which narrowly missed the consensus forecast of $10.47 billion. So far in today’s trading, the stock is up nearly 1%.
But this is really little relief for Schlumberger’s investors. Over the past year, the shares are off a painful 22%.
Although, perhaps the company is getting back on track? To decide, here’s a look at the pros and cons:
Global Scale. Schlumberger has operations in over 80 countries and has 113,000 employees. The company provides a full suite of services, such as well cementing, seismic analysis, directional drilling and well completion. With its scale, Schlumberger has a high success rate in snagging mega-contracts. One of the latest was a 30-year deal with Pemex, which is the largest oil company in Mexico. The deal involves a partnership with Petrofac and should be a nice revenue generator.
Technology. A key to Schlumberger’s success has been its focus on innovation. For example, the company’s Q-technology system uses streamer sensors that allow for 3D rendering of subsurface areas. It has been crucial for oil exploration. Another new addition is the HiWAY fracturing technique — a way to extract unconventional energy sources, using less water. Plus, Schlumberger invests more in R&D than all other oilfield services companies combined — its expenditures came to $1.1 billion in 2011.
Solid Financials. Schlumberge has $3.4 billion in the bank and its long-term debt is a reasonable $8.4 billion. The company also continues to buy back its shares. In the latest quarter, the purchases came to $499 million.
Energy Prices. They are certainly volatile. After all, there has been a big drop over the last month because of the weakening global economy. And the unpredictability of the global price of crude oil can make it extremely difficult for oil producers to plan their investments, which can mean lower contract sizes for Schlumberger.
Geopolitics. New sources of oil and other energy are often in areas that have potentially hostile political environments. This mean that, as seen in places like Venezuela and Argentina, nationalization is a real possibility.
Competition. To put it simply: It’s intense and price-cutting is normal. Some of Schlumberger’s key rivals include Halliburton (NYSE:HAL), Weatherford International (NYSE:WFT), Baker Hughes (NYSE:BHI) and Core Laboratories (NYSE:CLB). There is also emerging competition from operators in China.
Even with its scale and standout technologies, Schlumberger is vulnerable to the slowing economy, which will probably mean lower crude prices. The rising value of the U.S. dollar will also likely be a drag.
At the same time, Schlumberger’s stock is far from cheap. The current price-to-earnings ratio is 18 and the dividend yield is only 1.6%
So given all these factors, the cons outweigh the pros on the stock for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
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