Schlumberger: Premier Play in Oilfield Services

10/18/2017 5:00 am EST


Crista Huff

Editor, Cabot Undervalued Stocks Advisor

The stocks we select for our Growth & Income Portfolio have bullish charts, good projected earnings growth, dividends of 1.5% and higher, low-to-moderate P/Es and low-to-moderate debt levels, explains Crista Huff, editor of Cabot Undervalued Stocks Advisor.

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Schlumberger (SLB) is a premier oilfield equipment and services company with a global footprint. It uses innovative technologies in the areas of drilling, production and processing in the oil and gas industry. It creates value for its clients by lowering the cost-per-barrel of energy development.

Wall Street’s consensus estimates project Schlumberger and its main competitors to each experience significant margin expansion in 2018 and 2019. After earnings $1.14 per share (non-GAAP) in 2016, the firm is expected to earn $1.50 and $2.32 per share in 2017 and 2018.

Profits are therefore growing aggressively at rates of 31.6% and 54.7% in 2017 and 2018. With a price to earnings multiple of 45.9, the stock is overvalued based on 2017 earnings.


However, the 2018 P/E is 29.7, much lower than its corresponding earnings per share growth, making thestock distinctly undervalued in the coming year.

The company has not increased its dividend since the first quarter of 2015. The long-term debt-to-capitalization ratio is quite fair at 28%.

Many energy stocks are having a great year. If we break that down by industry within the energy sector, we see that refining and marketing companies’ stocks began climbing earlier this year, followed by those of integrated oil companies and exploration & production companies.

Oilfield services companies typically lag their sector peers, with many such stocks bottoming more recently and now on an upswing.

SLB fell dramatically in 2014 and 2015 when the price of oil plummeted, bottoming in early 2016. The stock then rose tremendously through December 2016, only to give back most of its gains this year.

At this point, the stock is rising.  There’s 22% upside, plus dividends, as SLB retraces its recent high near $86, at which point the shares will still be undervalued. This large-cap stock could appeal to traders, longer-term growth investors and dividend investors. We rate the stock a Strong Buy.

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