There are few industries that I am as bullish about as I am in oilfield service. This industry faces strong secular trends from greater demand for unconventional resources, and it is unreasonably discounted from today's low natural gas prices and input volatility. Below, I review various perspectives on Schlumberger Limited. (NYSE:SLB) and Halliburton Company (NYSE:HAL) with this bias in mind.
International To Drive Schlumberger's Future
Over the last 52 weeks, Schlumberger Limited. (NYSE:SLB) has hovered between its high and its low. At a a respective 19.7x and 13.7x past and forward earnings, the stock is neither expensive nor cheap. But when you look at future growth prospects of 16.5% annually over the next 5 years, it becomes clear that a bet on Schlumberger Limited. (NYSE:SLB) is a bet on a bullish oil & gas future. Analysts, accordingly, rate the stock around a "buy" with a consensus rating of "1" out of "5" where "1" is a "buy".
Compared to Baker Hughes Incorporated (NYSE:BHI), Schlumberger Limited. (NYSE:SLB) generates a greater amount of business as a percent of revenue (70%+ versus 44%) from markets abroad, which enables it to have a greater growth curve. In my view, this tailwind will hedge against industry-wide uncertainty from consumers. During the third quarter, revenue grew 1.5% sequentially, which was driven by a 3.1% rate from abroad. Perhaps more importantly, international margin expansion of 73 bps helped to offset domestic margin compress of 209 bps.
As strong of a growth investment Schlumberger Limited. (NYSE:SLB) is, I still believe that Halliburton Company (NYSE:HAL) is even better. Not only is Halliburton cheaper at a PEG ratio of 0.6x, it has had more consistent and greater positive earnings surprises. Furthermore, Halliburton Company (NYSE:HAL) is forecasted for greater annual EPS growth of 17.2% over the next half decade. This wouldn't be so big of a deal if Schlumberger didn't lack the momentum to make up the difference. Unfortunately, the oil well service provider has only grown EPS by 3.1% annually over the past 5 years--nearly 650 bps less than Halliburton Company (NYSE:HAL). While it may have the economic moat to secure a premium, it won't necessarily drive outperformance against a rising competitor.
Weak Performance Weighs On Baker Hughes's Downside
Over the last 5 quarters, Baker Hughes Incorporated (NYSE:BHI) has underperformed expectations by an average of 8%. This is especially troubling, since analysts are expecting double-digit EPS growth while Baker Hughes Incorporated (NYSE:BHI)'s EPS has slid 11.3% annually over the past 5 years. Although shares are decently cheap at 13.3x past earnings, poor performance won't take multiples any higher given the intense competition.
According to management, there are multiple headwinds keeping down earnings. Pressure pumping, for example, is challenged by industry imbalance that puts pressure on margins and profitability. Furthermore, customers are delaying activity due to over-leveraged balance sheets and commodity volatility. A customer bankruptcy in Europe and tax costs from a customer in Latin America further strain business potential.The closure of a British chemical manufacturing facility only adds to the list of corporate woes.