Avoid This Oilfield Equipment and Services Stock

Schlumberger Limited. (NYSE:SLB), the largest public American oilfield equipment and services company, has been seeing big benefits from the boom in oil and gas drilling in the onshore U.S. Last quarter its revenue was 11% higher than in the third quarter of 2011, helping drive its earnings up by 9%. According to the company, growth occurred both in reservoir characterization and in drilling operations. Looking at the first three quarters of 2012, net income is up 15% from the same period a year ago, though due to higher receivables cash flow from operations has been roughly unchanged.

Andreas Halvorsen

Schlumberger’s stock price is actually down 2% year to date, bringing its market capitalization to $91 billion. With earnings rising- at least for now, as it’s likely that drilling activity will eventually plateau- the trailing P/E multiple for the giant market leader sits at 17. Wall Street analyst expectations are for a 19% earnings growth rate over the next several years, with their projections implying a forward P/E of 14 and a five-year PEG ratio of 0.9. We might not be that optimistic, but it’s certainly tough to see the company as overvalued and Schlumberger Limited. could easily justify its stock price even if it does disappoint the Street going forward.

Andreas Halvorsen’s Viking Global more than doubled the size of its position in Schlumberger Limited. during the second quarter of the year; according to our database of 13F filings, the Tiger Cub and his team controlled a total of 8.9 million shares (find more stocks that Viking Global liked). Fisher Asset Management, managed by billionaire Ken Fisher, owned about 8 million shares at the end of June- this placed the value of its holdings at over $500 million (research other stocks that Fisher Asset Management has $500 million invested in). At the beginning of April, Lee Ainslie’s Maverick Capital had not owned any shares but the fund then initiated a position of 2.6 million shares by the end of June (see more of Lee Ainslie’s stock picks).

Halliburton Company (NYSE:HAL) is Schlumberger’s closest peer. At a $30 billion market cap it is considerably smaller, but still obviously a large and well-capitalized company. Its earnings were actually 12% lower in the third quarter than a year ago off of higher revenue, but with its stock price declining so far in 2012 as well, it is considerably cheaper on a multiples basis: it trades at 10 times trailing earnings and forward earnings estimates. Sell-side analysts think that the same trends that will power Schlumberger’s earnings numbers higher will be felt here as well: its five-year PEG ratio is actually even lower, at 0.7, in addition to its more immediate and historical multiples being lower. At first glance, it seems to us like a better buy.

We can also compare Schlumberger to National-Oilwell Varco, Inc. (NYSE:NOV), Baker Hughes Incorporated (NYSE:BHI), and Weatherford International Ltd (NYSE:WFT). These stocks also trade at large discounts relative to Schlumberger: for example, their forward P/E multiples are 11, 11, and 8, respectively. In Weatherford’s case, this reflects particularly high expectations from analysts as that company trades at 25 times its trailing earnings, but its top and bottom lines have been rising particularly rapidly, so this is perhaps appropriate and we’d like to look at the company more closely. The trailing P/Es at the other two companies are even at 13x, but over the medium term National Oilwell Varco is expected to see slightly higher growth rates (though both have five-year PEG ratios less than 1, signifying that based on analyst expectations they are undervalued). Baker Hughes has actually been seeing considerably lower net income, so we’d probably avoid that pick, but we can’t help but conclude that National Oilwell Varco as well as Halliburton look like good buys, both on an absolute basis and relative to Schlumberger.

There’s a certain appeal to owning a market leader, and we take that into consideration. In this case, however, Schlumberger trades at such a high premium that we’d advise looking at its peers instead.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!