Schlumberger Limited. (NYSE:SLB), the largest publicly traded U.S. oilfield services company by market capitalization (at $110 billion), recently reported its results for the second quarter of 2013. The company saw an 8% increase in revenue versus a year earlier, which was in line with the growth of its business from Q1. The 10-Q recorded a significant gain for Schlumberger Limited. (NYSE:SLB) on the formation of a joint venture specializing in subsea oil and gas services; if the results are adjusted for that and for a significant impairment charge last quarter then pretax income ends up rising 13% compared to the prior year period. About half of the company’s cash flow from operations in the first half of the year has gone to capital expenditures with most of the rest going to dividends and share repurchases.
The stock currently trades at 18 times trailing earnings, as investors expect profits to continue to grow in the future- possibly helped by the ongoing boom in oil and gas development in the onshore U.S., as well as continued triple-digit oil prices. Schlumberger Limited. (NYSE:SLB)’s buyback activities could also supplement earnings growth and generate steeper growth in earnings per share. Wall Street analysts are expecting the company to earn $5.74 per share next year, making for a forward P/E of 14. It should be noted that the connection between drilling activity and oil prices, and therefore to the overall economy, results in Schlumberger Limited. (NYSE:SLB) carrying a beta of 1.8.
The closest peer for Schlumberger Limited. (NYSE:SLB) is Halliburton Company (NYSE:HAL), considered a major player in the industry even though it is somewhat smaller with a market cap of $43 billion. Halliburton recently pled guilty to destroying evidence and settled with the Justice Department; with this uncertainty removed from the stock price it rose 4% on the day.
Earnings have recently been low for the company, and sales growth has been more limited than it has been for its larger peer. However, the sell-side expects Halliburton to rebound and so it trades at a small discount to Schlumberger on a forward earnings basis with a P/E of 11. Expectations for continued growth yield a five-year PEG ratio of 0.7, though it may be best to wait for the company’s actual results to improve before considering it as a value play.
Another peer in oilfield services is Weatherford International Ltd (NYSE:WFT). It is another company which has been struggling recently, going by recent reports, though as with Halliburton analysts seem to expect that general improvements in the industry will strengthen its bottom line. Weatherford is valued at 11 times forward earnings estimates, even with Halliburton on that basis, and also posts a five-year PEG ratio below 1. As with that stock it seems a bit risky to buy based entirely on the Street’s confidence in the 2014 numbers.
As a result investors interested in oilfield services investments should probably start by looking at Schlumberger at least for now, at least out of the companies which have been discussed here. Weatherford and Halliburton do feature lower forward P/Es but in each case the forward expectations incorporate a good deal of expected EPS growth next year from what are currently less appealing levels.
Disclosure: I own no shares of any stocks mentioned in this article.
