Schlumberger (SLB) is one of the founding firms in the energy sector. Its roots go back over 100 years. And in the intervening years, it has continued to be one of the most innovative and important companies in the sector.
Like the overall sector, this year has not been one of Schlumberger’s best … but it hasn’t been one of its worst either.
That’s because SLB has learned how to endure.
As an oil services company focused on the ‘upstream’ oil business — exploration and production, or E&P — no one is more aware of the vagaries of the energy patch than a company that has been at it as long as SLB.
In fact, in its recent earnings announcement, Schlumberger CEO Paal Kibsgaard said that he expects E&P not to recover until 2017. He suggested that even if prices do rise next year, many firms will use the price hike to repair their balance sheets before looking to ramp up production again.
Also in the announcement: In the first nine months of the 2015, revenue is down 34% in North America and 18% globally.
SLB Standing Strong Despite Challenging Times
But the one interesting thing the company is doing in this current crisis is it’s not fighting the tape. It’s not looking to find new business or increase business in current markets. It’s focused on its margins. It wants to maintain its current cash flow rate as the sector contracts.
It also has decided to consolidate its presence in the industry with its August move to acquire ‘heavy iron’ equipment firm Cameron International (CAM) for $14.8 billion. This will allow SLB to be a major force in most upstream operations and puts it ahead of the merged Halliburton (HAL)-Baker Hughes (BHI) in E&P influence.
Smart companies know when to look for acquisitions, and this deal for CAM is a testament to SLB’s ability to see opportunity where others see problems. And if you have the wherewithal, the vision and the financial strength, this is a prime time to consolidate your position.
And again, as a century-old enterprise, consolidating its position is something SLB has been doing successfully for quite a long time.
Acquisitions usually occur at two points. One is when a new boom is underway due to economic conditions or new sector opportunities, and companies are will buy companies at premiums to grow into a sector as quickly as possible. The other is when there is a sector downturn and companies can buy complimentary businesses at a discount.
The M&A activity in the energy patch will continue, and this may not be SLB’s last foray into the M&A market. Regardless, it was a smart buy and will help maintain cash flow and margins through a difficult 2016.
Bottom Line
For investors, this is good time to buy a great company. SLB is off about 8% so far this year, and it’s sporting a dividend yield around 2.7%. Getting a great stock at a solid discount with an above-average, rock-solid dividend is a rare opportunity.
If you are bearish on the energy sector, then buy in slowly. Buy a chunk now and then spread out the rest of your purchase over the next six to eight months.
This is a long-term investment, so it won’t make much of a difference over the long run, since SLB has as much growth in its future as it has in its past.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
