Schlumberger: "Big Company with Big Future"
11/29/2017 5:00 am EST
Schlumberger is the biggest of its kind. Operating in 85 countries, its equity market cap exceeds $88 billion. It is the leading provider of technology for drilling, production, and processing to the oil and gas industry. The firm provides the know-how and hardware for onshore and offshore energy explorers.
The firm's size has mattered to its investors. Roiling oil and gas prices have roiled the dividends of many energy companies over the past three years. Schlumberger’s dividend has held firm, like the other giants.
Schlumberger has more than held firm. Energy prices plunged in late 2014 and early 2015, but the company was able to raise its dividend 25% to $2 per share. The dividend, with its 3.2% yield, is at the high end of the market.
Its size has enabled it to maintain its dividend. Size, though, has been less effective in maintaining share price. The shares are down 24% year to date. The ongoing oil price rally since late June has offered little relief. The shares are down despite the company reporting exceptional third-quarter financial results.
In the conference call with analysts following the release of quarterly financial numbers, management said that investment in North America was moderating. Cash flow was taking precedence over growth. Investors were disappointed.
Good for us. We see opportunity. Investors focus on the tip of their nose and not the opportunities that reside on the horizon. Schlumberger is more than North America, it’s the world. It’s more than onshore, it’s offshore. It provides oil-field services to exploration companies everywhere.
Yes, international growth has yet to materialize, but that doesn’t mean it won’t. International deep-water drilling is particularly ripe for a rebound. Schlumberger generates 65% of its revenue outside of North America.
Schlumberger is the gold standard of the oilfield-services industry, not just because of the size and scale of its operations, but because it can generate earnings when energy prices are low. Its current share price fails to capture its true value. Investors are excessively pessimistic. This is a big company with a big future.
We value Schlumberger at $80 per share based on a 14 multiple of expected cash flow — EBITDA — of $8 billion in 2018. Our multiple is conservative. It’s below the historical 15 multiple that we think the stock deserves.
We see 25% upside potential over the next 12 months based on the firm's reliable earnings and cash flow through all phases of the energy cycle.