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Schlumberger: Head of the Class
05/21/2014 8:00 am EST
With a market cap of more than $130 billion and operations in over 100 countries, this recommended stock is the world’s largest, best diversified oil services firm, and the creme de la creme of the industry, asserts Elliott Gue, editor of the Energy & Income Advisor.
Schlumberger (SLB) is best of breed in the services space; the company has executed in both up cycles and down cycles and maintained the highest operating profit margins among the four largest oilfield services outfits in recent years.
Operating profit margins declined through much of 2012 because of weakness in the North American onshore market. But Schlumberger’s pretax, operating profit margins in North America held up reasonably well relative to the other major oilfield services firms and have led the industry since the third quarter.
This superior profitability stems from Schlumberger’s prescient management team, cutting-edge technology, and long history of execution.
Schlumberger has always been ahead of the curve. Seeing the writing on the wall, the company prepared for a downturn in the North American onshore market and ramped up its investment in other regions.
Meanwhile, technological innovations have enabled Schlumberger to grow its market share and profit margins. Since 2010, the company increased its drilling-related revenue at an average annual rate of 11%—a considerably higher rate than the market as a whole.
Schlumberger’s improving profitability and above-trend revenue growth in drilling-related services doesn’t reflect an upsurge in activity; rather, producers pay a higher price for products that improve their efficiency and lead to better recovery rates over time.
Over the past few years, the oilfield services giant has accelerated the pace of its product rollouts, enabling the firm to win market share in most product categories without making concessions to profitability.
The company remains at the head of the class. Given its technical expertise and industry-leading profit margins, Schlumberger’s shares should command at a premium to its peers. We’re raising our buy target on Schlumberger to $110 per share.
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