SLB – The Smart Way to Play the U.S. Energy Boom

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Schlumberger Limited (SLB) is a global oil and gas exploration and production service provider. Schlumberger is organized into three reporting segments as follows:

  • Reservoir characterization group, 27% of revenue and 38% of profits
  • Drilling group, 38% of revenue and 34% of profits
  • Reservoir production segment, 35% of profit and 28% of revenue

Through these three segments, Schlumberger is able to provide virtually everything an oil or gas exploration company needs in the field. Schlumberger is the dominant player in its sector and offers the widest breadth of products and services to its customers.

As the world’s population has increased, so has the demand for oil. Even with current political sentiment pushing for greener energy sources, oil still remains the dominant resource in the transportation industry and is also used in plastics, asphalt, tires, jet fuel and many other products consumed every day. Oil demand has remained steady but oil extraction has become increasingly more complex — which benefits oil service firms such as Schlumberger.

Schlumberger seeks to be at the forefront of technology, investing 2.5% of revenue into R&D annually. Schlumberger uses these investments to develop new products and services, redesign its workflow and develop common industry processes that increase efficiency. These efforts drive incremental margins and increase future earnings. The company also grows via opportunistic acquisitions to increase market share and expand its product offerings.

SLB – Strong Revenue Growth

Schlumberger first-quarter earnings rose 26% thanks to growth in revenues in the Middle East, Asia and North America. EPS for Schlumberger’s first quarter beat analyst exceptions by a penny. In the second quarter Schlumberger posted higher revenues driven by gains in international revenue growing 8% and North American revenue growing 6%. Profits, excluding charges and credits, were up 13% sequentially and 17% from the year prior.

Schlumberger’s second-quarter press release stated that the “economic outlook continues to be mixed,” citing the effects of the harsh winter in the U.S., a weaker forecast in Brazil, slow growth in the eurozone, and flatter GDP growth in China. Conversely, Schlumberger also stated that the gap between oil supply and demand was tightening, which would lead to higher oil prices in the future.

SLB – Buying Opportunity

Schlumberger logoDue to recent increases in oil prices SLB stock price pulled back from a 52-week high of $118 a share. With a current SLB stock price of $102, analyst price targets of $132, a P/E of 19.8 and forward P/E of 14.9, this is a great time to get in on the U.S. boom for black gold with less risk than investing in energy exploration companies.

In a recent investor presentation regarding 2017 financial targets, Schlumberger divulged that it is targeting revenue growth of 7%-8% and margin growth of 40%. Management has shown good judgment in making prudent acquisitions and continuing the focus of innovation that improves margins and revenue growth, making the attainment of these targets a reasonable goal.

A word of caution: Schlumberger is a big player in the Russian oil services market, which may lead to future projects in the Arctic … but also exposes the company to significant geopolitical risk and the effects of U.S. and EU sanctions. Forewarned is forearmed.

SLB stock is offering up a good buying opportunity to get in on a stock with great long-term price appreciation potential and 1.5% dividend.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/slb-stock-schlumberger-energy-boom/.

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