The two largest public energy services companies are Halliburton Company (NYSE:HAL) and Schlumberger Limited (NYSE:SLB). At large market capitalizations ($30 billion for Halliburton and just over three times that for Schlumberger), both companies are also well positioned to benefit from the boom in onshore oil and gas production in the United States that has been catalyzed by advances in hydraulic fracturing technology. Dividend yields are between 1% and 1.5%.
As energy services companies, Halliburton Company (NYSE:HAL) and Schlumberger Limited (NYSE:SLB) are indirectly exposed to oil and gas prices. They depend on drilling and maintenance activity on oil and gas fields; maintenance activity is generally independent of pricing but drilling activity depends on the returns that oil and gas companies expect from drilling a particular well or portfolio of wells. Higher prices- as well as technological breakthroughs that increase the share of oil that is recoverable- therefore leads to more drilling.
Schlumberger trades at 18 times trailing earnings, with a forward P/E multiple of 14. Over a longer period, sell-side analysts project aggressive growth carrying the large-cap company to a five-year PEG ratio of 0.8. Halliburton Company is considerably cheaper in the short term, with trailing and forward P/Es of 10 and 9, respectively. Even over a longer time frame, the smaller company preserves its lower valuation with a five-year PEG ratio of 0.6. The betas of the two stocks are nearly identical at 1.7, and tend to move closely together. For purposes of comparison, oil supermajors Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) trade at 9 and 8 times trailing earnings but have more direct exposure to oil and gas prices. Baker Hughes Incorporated (NYSE:BHI), primarily provides oilfield equipment such as drill bits and carries a trailing P/E multiple of 11. If an investor is willing to accept more pure drilling exposure Baker Hughes might be a good pick, but Schlumberger and Halliburton offer much of the same upside with a stable base of maintenance related work.
Halliburton roared to 22% revenue growth in the second quarter compared to the same period of the previous year, and after recording a strong first quarter as well revenue was up 24% for the first half of 2012. Costs have risen, leading to flat earnings for the second quarter, but for the first half the company still recorded a 9% increase in net income. Operating income, particularly in drilling activities, has surged but higher corporate expenses have helped offset this. Schlumberger’s 16% revenue growth last quarter compared to the second quarter of 2011, and 19% growth for the first half, is a bit lower but still respectable particularly given the company’s larger size. Schlumberger Limited, however, has been better able to control its costs: earnings were up in both quarters, leading to an 18% increase for the first half of the year. In summary, Halliburton is doing a better job at revenue growth but its margins have been shrinking, partially explaining why it trades at lower earnings multiples than Schlumberger.
Hedge funds have large investments in both companies- in fact, both made our list of the ten most popular energy stocks among hedge funds. In the second quarter of 2012, billionaire Leon Cooperman of Omega Advisors and Renaissance Technologies (founded by fellow billionaire Jim Simons) both increased their stakes in Halliburton by over 30%. See more stock picks from Renaissance Technologies and from Omega Advisors to see what else these billionaires and their investment teams are buying. Tiger Global, managed by Tiger Cub Andreas Halvorsen, nearly tripled the size of its Schlumberger position during the second quarter (find other stocks that Halvorsen likes) and Lee Ainslie’s Maverick Capital initiated a position of 2.6 million shares (check out Maverick Capital’s portfolio).
The choice between Halliburton Company (NYSE:HAL) and Schlumberger Limited (NYSE:SLB) is a choice between an attractive valuation and low growth (Halliburton) and a larger, higher-valued company which has recently been able to preserve its margins as it grows, enabling higher earnings growth (Schlumberger). We think that Halliburton is a better buy, as even looking at projected growth over the next five years leaves it at a lower earnings multiple than Schlumberger.