Along with announcing earnings, both Halliburton Company (NYSE:HAL) and Schlumberger Limited. (NYSE:SLB) announced multi-billion-dollar stock buybacks. With so much money on the line, investors have to ask if this is the right move for these two oil-field service giants. Are these stocks cheap enough to warrant the buybacks or should these companies consider other options for those funds?
Before considering what else these companies could or should be doing with all that money, it’s a good idea to take a look at what’s already been decided. Taking a look at Schlumberger Limited. (NYSE:SLB), the company just finished up its previous $8 billion buyback program which was approved in April 2008. This past quarter, the company spent $500 million and was able to snap up 6.8 million shares at an average price of $73.07, basically to complete the authorization. With shares trading about $10 more at the time of this writing, it would appear that the company got a pretty good deal.
However, looking ahead, the company’s board has approved a new $10 billion buyback program. It expects to complete this by June 2018. For perspective, the company’s market cap is just over $110 billion, so the authorization would equate to about 9% of its currently outstanding shares. Yet with shares trading at 18 times earnings, the stock isn’t exactly a screaming bargain.
Halliburton Company (NYSE:HAL) also largely exhausted its previous stock buyback plan after spending a billion dollars to repurchase 23 million shares in the second quarter. The company reloaded its plan so that it now has another $5 billion to repurchase its stock. That would allow the company to buy back about 12% of its outstanding shares. However, like Schlumberger Limited. (NYSE:SLB), its stock isn’t exactly cheap at more than 21 times earnings.
As long as both companies are opportunistic in the buybacks, then shareholders will do well in the long term. However, buybacks might not be the best option here. In reading through earnings reports and conference call transcripts over the past year, two trends have been very clear in the oil-field service and equipment sector. The North American market is very challenged, while growth is being supplied internationally. One of the big issues in the North American market is competition. This is why I think it would make more sense for these companies to use their cash to reduce the competition by acquiring it.