For better or worse, Schlumberger (NYSE:SLB) is a stock that will give investors multiple second chances. Although this company is regarded as the best of the oil services companies, the ups and downs of the energy market (and the resulting impacts on exploration, drilling, and production activity) lead to wide swings in operating performance and the stock price. With surprisingly solid margins, signs of improvement in North American activity, and strong multi-year prospects in deepwater, subsea, and international projects, this could be a good time to consider these shares.
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Not A Great Quarter, But Somewhat Better Than Expected
With activity trailing off worse than expected in the fourth quarter (and more price competition than expected), Schlumberger did post a slight revenue miss for the first quarter of 2013. Revenue rose 8% from the year-ago period, but fell 5% sequentially.
The revenue miss was generally across all geographies, though least bad in the Mideast/Asia region. Revenue in North America fell 3%, while Latin America and Europe/Russia/Africa rose 9%. In the Mideast/Asia region revenue rose 22%. On an annual basis performance was pretty even among the business lines, as production, reservoir characterization, and drilling revenue rose 7%, 8%, and 9% respectively. Sequentially, though, drilling was flat, while production was down 4% and reservoir characterization was down 11%.
Schlumberger's margins were better than expected, but not exactly strong on their own terms. Operating income rose 5% (and fell 6% sequentially), as oilfield services revenue rose 4% and fell 6% respectively. Operating income was down 19% in North America, but rose by double digits in the other geographies. On a margin basis, the North American region was the only one to see a year-on-year decline in margins. Not uncommonly for this company, Schlumberger once again beat Baker Hughes (NYSE:BHI) and Halliburton (NYSE:HAL) for the best margins this quarter.
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Looking For Things To Get Better
While Schlumberger's management was not particularly aggressive in the wake of these results, they did seem generally positive. Even with the recent drop in oil prices, activity has been improving somewhat and prices are still high enough to make oil production profitable for most producers in North America. Likewise, international pricing is improving somewhat, though the improvements are more skewed to the smaller projects.
Clearly it's anybody's guess as to whether a recovery in the energy sector is on the way. If the Chinese and/or American economy slow further, it's hard to be optimistic about oil and gas prices in the short term.
Longer term, though, it's harder not to be on optimist on Schlumberger. Not only does Schlumberger have a broadly balanced array of businesses, the company has a long history of innovation and operational excellence. With opportunities like the Cameron (NYSE:CAM) joint venture (where they are targeting a doubling of deepwater recovery rates) and the emerging shale market in China, Schlumberger should be looking at years of strong prospects.
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The Bottom Line
The recent decline in oil prices has hit the oil service and equipment sector, including Schlumberger. With that move, this stock now looks cheap relative to its historical trading multiples. Assuming that the sell-side target for 2013 EBTIDA is accurate (and that's admittedly not a small “if”), Schlumberger should be trading around $74. Keep in mind, too, that I use a multiple that is lower than the company's historical forward multiple and that the multiple usually grows when investors get bullish on the sector again.
Schlumberger, and the sector as a whole, is just too volatile to make sense as a long-term holding for most investors. That said, these shares can do quite well when they run. It may be premature to call the all-clear in oil services, but I do believe that higher energy prices and better earnings for the major service providers is a “when, not if” proposition and that Schlumberger is a good stock to hold for that move.
At the time of writing, Stephen D. Simpson owned shares of Cameron International Corp.