Analyzing Schlumberger (SLB)-

By Yaser Anwar, CSC of Equity Investment Ideas

• As a global oilfield and information services company with major activity in the energy industry, Schlumberger operates in two primary business segments: Oilfield Services (provides exploration and production services, solutions and technology to the petroleum industry) and WesternGeco.
• In the last couple of years, Schlumberger has focused its attention on the oilfield service market by divesting all of its non-oilfield businesses. It used the approximately $2.8 billion in proceeds from those divestitures and asset sales to strengthen its balance sheet & make acquisitions.
• In April 2006, SLB acquired BHI’s 30% stake in WesternGeco joint venture for $2.4 billion in cash. Investors should view this favorable as the deal should enable SLB to capture the full value of rising demand for reservoir seismic services.
• SLB’s 06 3rd Q revenue grew 34% to $4.95 billion, compared with $3.7 billion in the previous year. In the Oilfield Services segment, revenue rose 32.0% to $4.3 billion vs. $3.26 billion in the comparable quarter of 05. Revenue from the WesternGeco segment jumped 51% to $659 million vs. $436 million in the previous year.
• SLB’s growth markets in the oil patch include Russia and the Caspian, ME and Asia and the deepwater regions offshore the Gulf of Mexico, West Africa, and Brazil (This region’s growth was due to higher demand for Drilling & Measurements technology in Venezuela). With more than 2/3rds of the revenue coming from outside North America, SLB has a strong presence in each of these markets. While activity levels in these markets have started to pick up, pricing power is still weaker vs to North America.
  

  According to Zacks, While activity levels in North America, particularly in the onshore markets, have reached peak cycle levels, most of the other global markets are at much earlier stages. We think that this plays to Schlumberger s strengths, given its strong international presence and long-standing relationships with national oil companies, market leadership position, and a track record of technological innovation.

• They, like myself, think that international pricing will follow the North American lead, which should help sustain Schlumberger s margin-improvement trend of the last few quarters.

• Management expects project work in the ME & Asia to pick up significantly in the near to medium term. The company has also been experiencing an improvement in pricing trends in these regions recently.
• Revenue from NA climbed 42.0% to $1.35 billion, YoY, fueled by a rise in ultra deep-water activity, rapid growth in rig count, higher pricing in US land operations, absence of major storms in the Gulf Coast, and higher activity in Canada. Furthermore, SLB’s earnings have increased from $1.69 to an estimated $2.94 over the past 4 quarters, they have shown acceleration in quarterly growth rates when adjusted for the volatility of earnings.
• However, investors should note that the industry is cyclical and mature, its fortunes are directly tied to the general economic activity that drives energy demand. That’s where SLB comes into play as I mentioned above that 2/3rds of the revenue coming from outside North America.
  

  According to Zacks, recent analyst earnings forecasts for SLB have shown no change which indicates little variation inexpected earnings growth. Relative to changes in earnings forecasts for other companies SLB compares favorably. SLB has reported earnings that were higher than those predicted in earlier estimates which may be a positive for future earnings growth.

• Before I end, SLB provides vital equipment and technology to the O&G industry. As more oil wells are discovered in hard to drill places, and the ones that need to be found by exploration companies, I view a growing trend toward O&G development opportunities that require higher levels of technology aka SLB’s equipment and tech.

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