Schlumberger Limited. (SLB), Halliburton Company (HAL), Baker Hughes Incorporated (BHI): Which Oil Services Company Is Right for You?

Now that earnings season is underway, you may notice that oftentimes similar companies will report around the same time. For example, you may notice that many of the steel producers will report within a few days of one another. Today, I’d like to focus on a trio of oil services companies, Schlumberger Limited. (NYSE:SLB), Halliburton Company (NYSE:HAL), and Baker Hughes Incorporated (NYSE:BHI). Schlumberger and Baker Hughes both report this Friday, July 19, while Halliburton reports on Monday, July 22. We’ll take a look at each of the three companies, and then see which looks to be the best value before earnings.

Schlumberger: the big one

As the heading implies, Schlumberger Limited. (NYSE:SLB) is the largest of the three companies featured here, and is the world’s largest oilfield services company. Of the three, Schlumberger is the most internationally focused, with just 32% of revenues coming from North American operations. The company provides such services as drilling, measuring, well testing, data and consulting services, and other various well services.

As an investment, Schlumberger Limited. (NYSE:SLB) seems reasonably valued, especially given the company’s projected earnings growth over the next few years. Shares currently trade for 16.6 times 2013’s expected earnings of $4.66 per share. Due to a higher operating margin and the increase of drilling activity in the Gulf of Mexico that is projected to occur over the next few years, Schlumberger is expected to grow its earnings to $5.66 and $6.67 in 2014 and 2015. This gives us a 3-year average annual growth rate of 17%, which sounds amazing given the P/E. Bear in mind that this is not without risk, as a slower-than-expected rate of new drilling permits issued could derail this company’s growth very quickly!

Another note is that although none of the three pay a huge dividend, Schlumberger Limited. (NYSE:SLB) is the highest yielder of the group, with a 1.63% yield, compared with 1.12% from Halliburton Company (NYSE:HAL) and 1.23% from Baker Hughes Incorporated (NYSE:BHI).

Halliburton

While it is much smaller than Schlumberger Limited. (NYSE:SLB) in terms of market cap, Halliburton Company (NYSE:HAL) is the leading U.S. oilfield services company, with a higher focus on North American operations. Halliburton provides services and products related to the exploration, development, and production of oil and natural gas, and divides its business into two segments: Completion & Production and Drilling & Evaluation. While the majority of its revenues currently come from North America, the company has begun to place more emphasis on its operations in the Eastern Hemisphere, as evidenced by the 2007 move of the corporate headquarters from Houston to Dubai.

On the surface, Halliburton Company (NYSE:HAL) appears to be a bit cheaper than Schlumberger Limited. (NYSE:SLB), trading at 13.8 times this year’s projected earnings of $3.19, which are projected to increase to $4.03 and $4.77 over the next two years for the same reasons mentioned for Schlumberger. This gives us the same 17% annual earnings growth rate, but there are a few things to consider. First, with most of its revenues dependent on the North American drilling market, they are even more dependent on the health of the Gulf of Mexico’s new drilling permits. Additionally, Halliburton still has legal implications from the Deepwater Horizon disaster, as the company had staff employed on the ill-fated rig, and in fact had just completed cementation of the final well 20 hours before the explosion. Whether or not the company will be found liable for anything related to the disaster remains to be seen, it just adds risk to the company’s future profitability.

Baker Hughes

About one-fifth the size of Schlumberger Limited. (NYSE:SLB), Baker Hughes Incorporated (NYSE:BHI) operates in 90 countries and derives about half of its revenues from North America. The company provides a very similar variety of oilfield products and services as the other two, and just like Halliburton Company (NYSE:HAL) is starting to emphasize overseas growth. These companies are so similar, that their businesses are divided in almost the exact same way, into a Drilling & Evaluation Group and a Completion & Production Group.

Baker Hughes Incorporated (NYSE:BHI) trades for 16.1 times 2013’s consensus projection of $3.05 per share, in line with Schlumberger Limited. (NYSE:SLB) as it doesn’t carry quite as much risk as Halliburton Company (NYSE:HAL). The company’s earnings are projected to rise to $4.13 and $4.80 over the next two years, for a 3-year growth rate of 17.2% (shocking how similar all of these companies are, huh?).

Thoughts

As things stand right now, if you don’t mind the added risk of being dependent on one market and having legal issues hanging over their head, Halliburton Company (NYSE:HAL) is certainly the “cheapest” of the three. Personally, I prefer the strength that comes with Schlumberger Limited. (NYSE:SLB) being the biggest in the industry, not to mention the geographical diversity of their operations and their best-in-breed dividend yield.

Having said all of that, one of the best things about earnings season is that projections and valuations can literally change overnight. Other than the obvious implications of meeting or missing the estimates, keep an eye on any discussion of increased activity in either the Gulf of Mexico or in frontier markets such as Africa for clues as to the direction of these companies over the next few years.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Halliburton.

The article Which Oil Services Company Is Right for You? originally appeared on Fool.com.

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