Drilling Into Oilfield Services Companies

By Glenn Curtis | February 21, 2010 AAA

Let's face some simple facts: The population of the world is increasing, and the resources that we depend on (such as oil) are limited. That means that oil companies will have to go further, deeper and put more effort into tapping black gold, and that in turn should play directly into the favor of well-positioned oilfield service companies. With that in mind, today we will hone in on Schlumberger (NYSE:SLB) in detail, given recent news that it intends on purchasing Smith International (NYSE:SII).

IN PICTURES: Learn To Invest In 10 Steps

Drilling Down Deep
Over time, the demand for oil will increase, as economies develop and populations around the world grow. And Schlumberger seems to be well-positioned to benefit financially from those trends. In short, while that big picture view is important, there are also some nearer-term things that could drive the stock.

For those not familiar with the name, Smith is a Texas-based company that supplies products and services to oil and gas customers. In terms of financials, Smith is an impressive company. Analysts expect the company to generate more than $9 billion in revenue this year, and to earn $1.09 per share. Moreover, it is expected to grow at a double-digit rate per annum in the next five years.

Above and beyond that, the transaction could generate interest from the analyst community and cause it to tweak its forward-looking models. This in turn could drive additional interest in the stock and potentially convince longer-term investors to latch on. For the record though, even without Smith, Schlumberger is attractive. Analysts are expecting the company to generate $2.91 in earnings in 2010 and $3.83 per share in 2011. That expected EPS growth would be impressive, particularly in this operating environment.

Halliburton and Others Worth Drilling Into
Because the demand for black gold should be so strong in the future, the pie is big enough for other oilfield service companies to operate and perform well. Halliburton, based in Houston is expected to earn an impressive $1.40 per share in 2010 and $2.11 per share in 2011. By almost any measure, that would be an impressive rate of growth if achieved. Finally, Baker Hughes (NYSE:BHI), which has a vast international reach as well and works in consulting, products and services, could well hit a new 52-week high in short order. It is expected to earn $2.03 a share this year and $3.06 per share in 2011.

The Bottom Line
While retailers of gasoline have the potential to generate solid profits in the future, so do oilfield services companies, due to what will likely be a sizable increased demand for oil. And among the oilfield service giants, Schlumberger is worth a closer look. Its planed hitch-up with Smith could end up bringing a good deal to the bottom line, and expand the company's already broad footprint around the world. (Learn more about what makes an acquisition work, see: What Makes An M&A Deal Work?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Analysis
  1. These stocks have been weak, and despite rallies, investors might be better served by selling or shorting as opposed to buying.
    Chart Advisor

    Time To Take Profits On These 4 Rallying Stocks?

  2. With its huge population and booming economy, China is tops for many emerging markets investors. Here's a leveraged ETF for those who want to double down.
    Stock Analysis

    This Leveraged ETF Is For China Bulls

  3. Chart Advisor

    Is Natural Gas About to Tank?

  4. Chart Advisor

    Is It A Breakout? See The Point-And-Figure Chart

  5. Stock Analysis

    Abenomics Finds Recession, Selloff - Ahead of Wall Street

Trading Center