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Schlumberger: Top of the Value Chain

06/13/2014 8:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

The biggest mega trend in the United States and the world has been in the oil and gas business, explains Mark Skousen, editor of Fast Money Alert.

There's money to be made in oil service companies, which supply the exploration and drilling companies with the equipment and services they need to succeed.

Among the most advanced suppliers of oilfield services is Schlumberger (SLB). The Houston-based oil services company has been in the forefront of developing more efficient ways to drill oil and gas, such as the walking pads.

Schlumberger has widened its capabilities through select joint ventures and targeted acquisitions.

Be it a mega-merger with Smith International or the acquisitions of smaller companies in new spaces such as NovaDrill and Liquid Robotics, Schlumberger has ensured that it remained atop the oilfield services value chain.

Among its competitors, Schlumberger has the best operating margins for the past eight straight quarters and also has the top gross profit margin of 24.24%.

In terms of revenue growth, except for Europe/CIS/Africa, Schlumberger has had the highest growth in the first quarter.

It has an outstanding return on equity (ROE) of 19% and a price/earnings-to-growth (PEG) ratio of less than 1 (excellent).

It also has over $7 billion in cash, plenty to cover its debt load, and is selling for 15 times anticipated earnings for 2014-15.

SLB has had a rising dividend policy from the beginning, currently yielding 2%. It reports earnings on July 17.

In the past 11 years, 81% of the time the stock price has risen significantly before its earnings report. Let's buy Schlumberger at market today and set a protective stop of $83 a share.

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