This oil and gas supplier is growing at a double-digit pace, with earnings estimates continuing to increase.
Schlumberger (SLB)
from Dow Theory Forecast
Schlumberger’s (SLB) mastery of new technologies allows it to command premium prices and take market share, even as pricing pressure remains an ongoing challenge in the oilfield-services industry.
Weather slowed activity at projects in Russia, China, and North America during the March quarter. Last month, Schlumberger also pointed to signs of an economic slowdown in China and noted the political unease in Ukraine; the company expects these headwinds to abate in the June quarter. Schlumberger says fundamentals within the energy sector remain intact, with strong demand and supply disruptions likely to keep the price of oil near $100 per barrel, a level that encourages investment from energy producers.
North American drilling activity was robust in the March quarter, though weather delays and pricing pressures put some pressure on Schlumberger’s profitability. Cash from operations rose more than 20% in seven straight quarters. Free cash flow totaled $4.38 billion for the 12 months ended March, seven times higher than the same period a year earlier.
Strong cash-flow trends have inspired management to accelerate stock repurchases. Schlumberger now plans to complete a $10 billion buyback program announced last July in two and-a-half years—half the time it had originally targeted. About $7.4 billion remains on the plan, equating to 5.5% of outstanding shares. Schlumberger will also continue to pursue strategic acquisitions and annual dividend hikes, which have ranged from 10% to 28% in the past four years.
Schlumberger has grown sales more than 6% in 16 straight quarters, a trend analysts expect to continue into 2015. Management expects June quarter earnings per share near the $1.35 earned in the December quarter, and the current consensus of $1.36 implies 18% growth. For the year, the consensus projects 20% higher profits, well ahead of the 11% average for S&P 1500 energy stocks. Despite superior growth prospects, Schlumberger shares trade roughly in line with sector peers.
Schlumberger shares, delivering a 13% total return so far this year, have helped lead the energy sector’s resurgence. The S&P 1500 energy sector finished in the bottom half of the index’s 10 sectors in five of the past six years. It ranks second in 2014, with the sector index returning 6% and stocks averaging total returns of 9%. Schlumberger is a Focus List Buy and a Long-Term Buy.
Richard J. Moroney, CFA, Dow Theory Forecasts, www.dowtheory.com, 800-233-5922, May 5, 2014