Schlumberger: What Slowdown?
03/04/2014 10:30 am EST
It's no secret that capital spending budgets are falling at oil companies across the globe, but that's not the case for this company, writes MoneyShow's Jim Jubak, who points out the efficiency measures and new technology products responsible for much of its success.
Everyone knows that capital spending budgets at the world's oil companies are falling.
On January 17, the oil services and technology company reported fourth quarter earnings of $1.35 a share, beating Wall Street estimates by two cents a share. Earnings grew by 29.8% year over year.
Revenue climbed 7.4% year over year to $11.91 billion. That was slightly below the $11.98 projected by Wall Street.
I think you can tell what's going on at Schlumberger simply by taking a glance at those earnings and revenue growth rates. Revenue growth is indeed sluggish in the oil field. But Schlumberger's margins are climbing, thanks to efficiencies at the company and, especially, thanks to its years of investment in oil field technologies.
For example, while oilfield services revenue climbed just 7.4% year over year in the fourth quarter, pretax operating income grew by 23% year over year.
Efficiency measures at Schlumberger have included faster maintenance, better transportation set ups, and increases in asset turns. The company reduced Days Sales Outstanding (DSO)—a measure of how long it takes to get paid after a sale—to 91 in the quarter, from 96 in the first quarter of 2013. Days Sales of Inventory (DSI)—a measure of how much inventory a company carries to support its sales activities—fell to 55 days from 57 days. That helped produce operating cash flow of $10 billion for Schlumberger in 2013, a record for the company.
At the same time, Schlumberger has increased the speed with which it rolls out new technology products. For example, it's HiWAY fracking equipment, which reduces required fluids and proppant per well, has let Schlumberger add market share and margin, in what is an otherwise slow North American market. Schlumberger's technology offerings also have led to an increase in tenders submitted in Mexico, as the national oil company Pemex looks to revive oil production in that country with a new energy law allowing foreign investment in prospect.
The result is that return on invested capital, which bottomed at 11.85% in 2011, according to Morningstar, rebounded to 12.97% in 2013, again, according to Morningstar, and is set to continue higher in both 2014 and 2015. Credit Suisse, which calculates different numbers for return on invested capital, sees ROIC climbing from 15.4% in 2013 to 15.96% in 2014 and 17.44% in 2015. That wouldn't return the company to the halcyon days before the global financial crisis, when ROIC hit 24.66% in 2008, but it's a huge achievement in the midst of a slowdown in capital spending by the global oil industry.
As of March 3, I'm raising my target price on Schlumberger to $107 a share by February 2015, from the current target of $88 a share. (The stock closed at $91.26 on March 3.) On January 16, the company's board of directors voted to increase the quarterly dividend by 28% to 40 cents a share. That brought the dividend yield to 1.75%. (The ex-dividend date was February 14.)
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Schlumberger as of the end of December. For a full list of the stocks in the fund see the fund's portfolio here.