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Halliburton Company (HAL), Baker Hughes Incorporated (BHI), Schlumberger Limited. (SLB): This Oilfield-Services Titan Stands Out From the Crowd

Oilfield-services titan Schlumberger Limited. (NYSE:SLB) recently released its quarterly results, in which it beat both revenue and income estimates while significantly increasing its buyback program. Analysts at Global Hunter have identified that the company could deliver solid earnings of more than $6 per share by 2014, up from the current $4.59 per share. Its competitive advantage lies in its global footprint and technological prowess.The industry outlook is also looking bright as Schlumberger is expecting a “double-digit” uptake in customer spending on oil exploration.

Sector review

Schlumberger Limited. (NYSE:SLB)The strong performance was attributed to more deep-water drilling. Schlumberger Limited. (NYSE:SLB) reported an 8.1% increase in quarterly revenue to $11.2 billion, $30 million above consensus, which translated into EPS of $1.15 per share, $0.04 above estimates. The international segment outperformed the North American units; the former registered sales growth of 8%, while the latter saw a 2% increase. Unlike its rivals Halliburton Company (NYSE:HAL) and Baker Hughes Incorporated (NYSE:BHI), Schlumberger earns about two-thirds of its revenue from outside of the U.S and Canada.

Schlumberger Limited. (NYSE:SLB)’s closest rival, Halliburton Company (NYSE:HAL), also reported a decent quarter. With revenue of $7.3 billion and EPS of $0.73, Halliburton also managed to beat both top- and bottom-line estimates. The company is also looking to settle its 2010 Gulf of Mexico oil disaster liabilities, which explains its recent rally. Halliburton yields considerable influence in the North American market and will reap the biggest rewards from the U.S. oil boom.

On the other hand, Baker Hughes Incorporated (NYSE:BHI), the smallest of the big three oilfield-services firms, has disappointed investors. Its earnings came in below estimates as the company’s net profit dropped by 45% to $240 million, which was blamed on margin pressure in North America and weakness in Brazil and Mexico.

However, Baker Hughes delivered better-than-expected performance in the international market with growth of 7% coming from strength in Middle East/Asia, Russia and Africa. Nonetheless, Baker Hughes’ bottom line is its biggest weakness, and its revenue growth isn’t impressive either. The company needs to deliver solid earnings growth consistently, but I don’t see that happening until North America recovers.

Buyback update

During the quarter, Schlumberger Limited. (NYSE:SLB) repurchased 6.8 million shares, nearly completing its $8 billion share-buyback program announced in April 2008. However, a new and even bigger $10 billion buyback program has been approved, which will be completed by the middle of 2018.

Industry outlook

The great thing about oilfield-service firms is that they (or at least most of them) continue to generate reasonable returns even when oil prices are depressed. But the healthy pricing environment creates even more opportunities as oil companies have an incentive to increase their exploration and production budgets.

The Brent oil prices have averaged at about $100 per barrel since 2011, which is luring the clients of oilfield-services companies to continue their hunt for oil and gas reserves in the farthest corners of the world. This has created a healthy business environment. This trend will likely continue in the near term, which will translate into more business for the oilfield-service firms in general and international services-focused Schlumberger Limited. (NYSE:SLB) in particular.

Therefore, at the current price levels, I am long-term bullish on this sector, particularly Halliburton and Schlumberger, which have been more profitable and far more efficient in terms on returns on assets and equities than Baker Hughes.

Schlumberger Halliburton Baker Hughes
ROA 8.17% 9.01% 4.39%
ROE 18.09% 12.28% 5.89%

Performance summary

The three are currently trading close to their 52-week highs. In fact, in the early hours trading of August 13, Halliburton was just $0.10 below its year’s high level. But I expect the stocks to move higher in the long run. This year, Schlumberger is up 18%, Halliburton up 35.3% and Baker Hughes up 19%.

Schlumberger Halliburton Baker Hughes
Stock YTD 18.07% 35.31% 19.03%
P/E 2013 Est 16.86 14.52 16.08
P/E 2014 Est 13.98 11.25 11.62

Although Schlumberger has been behind its rivals and is trading at slightly higher multiples of current year and next year’s earnings estimates (shown in the table above), I believe the stock is still attractive at these price levels.

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