With growing demand for oil and more unconventional fields being brought online every day, Halliburton and Schlumberger are looking to grow in the years ahead. From Mexico to Saudi Arabia governments are fighting declining production, and they need the advanced services that only experienced multinationals can provide.
Where Is The Best Place For Your Capital?
Return on investments and profit margins show that Schlumberger Limited. (NYSE:SLB) uses its capital more effectively, leaving more cash for capital investments, share buybacks or its dividend. Low U.S. natural gas prices have put damper on domestic drilling and Halliburton’s operations, while a more competitive international hydrocarbon market has helped Schlumberger. Halliburton Company (NYSE:HAL)’s return on investment of 9.5% and a profit margin of 6.6% are a step below Schlumberger’s profit margin of 13.8% and ROI of 13.4%. Looking at the default risk held in these firms’ balance sheets, Schulmberger and Halliburton are practically the same with total debt-to-equity ratios around 0.32.
It is not hard to understand why Schlumberger and Halliburton are performing differently; Schlumberger is more internationally focused than Halliburton. North America is suffering from pipeline constraints, and it is best to have wide international exposure. Around 30% of Schlumberger’s second quarter revenue came from North America while 52% of Halliburton’s Q2 revenue came from North America. Going forward, Halliburton should get a boost as rising natural gas prices start to revive U.S. drilling. Even though Halliburton will greatly benefit from Pemex opening up new fracking fields, Schulmberger is a more attractive company overall. Its wider international base allows it to benefit from Pemex and others.
It is important to note that Seadrill Ltd (NYSE:SDRL)’s total debt to equity ratio of 1.78 and long-term debt-to-equity ratio of 1.34 are significantly higher than those of competitors like Transocean LTD (NYSE:RIG). You should be aware that, in the case of a future downturn, Seadrill’s high debt load could force the company to cut its industry leading dividend.
HAL Debt to Equity Ratio data by YCharts
Conclusion
National oil companies are here to stay, and oil and gas service firms are a great backdoor to invest in closed off nations. Seadrill’s history with Pemex is encouraging, but the company’s large debt load gives Seadrill Ltd (NYSE:SDRL) a large amount of risk. While Halliburton Company (NYSE:HAL) and Schlumberger Limited. (NYSE:SLB) both make significant portions of their income selling to national oil companies, Schlumberger’s greater international focus makes it a better growth opportunity for the coming years.
The article Mexico Is Making Its Comeback originally appeared on Fool.com.
Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Halliburton and Seadrill. The Motley Fool owns shares of Seadrill.
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