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Doing $100 on Schlumberger's Profit HiWAY

NEW YORK (TheStreet) -- Back in August, as shares of oil services giant Schlumberger (SLB - Get Report) traded at around $81 per share, I didn't see anything that would prevent the stock from reaching $90. This is even though Schlumberger -- as with rivals Halliburton and Baker Hughes -- was being hurt by (among other things) weak oil prices and soft rig counts.

Today, shares of Schlumberger, which now trades at around $93, are up 15% since my $90 target. As I've written recently in my Halliburton article, which prompted an invitation to speak with Barry Armstrong of Boston's WRKO, it looks as if the entire oil services industry has finally reached bottom. But there are also indications that even at 15 times forward earnings, Schlumberger's stock may yet be cheap.

Unlike Halliburton, which generates 50% of its revenue in the U.S., Schlumberger enjoys a significant portion of its business from international markets. And this certainly proved an advantage this quarter as overall revenue grew 4% sequentially to $11.6 billion, with 7% growth coming in from North America, while international revenue grew 3%.

To the casual observer, these numbers may not impress, especially when compared to Halliburton's 13% international growth. But investors shouldn't discount the effect of the 60/40 OneSubsea joint venture, which Schlumberger owns with Cameron International (CAM)

What this means is that, when including the OneSubsea business, Schlumberger's revenue growth would have been closer to 5%, which would have more than tripled Halliburton's revenue growth. What's more, it certainly seems as if Schlumberger has begun to differentiate itself from its peers -- particularly from the standpoint of innovation as it looks to increase oilfield productivity in North America.

As noted, Schlumberger has less North American exposure than both Halliburton and Baker Hughes. With the ongoing pricing weakness in the U.S., Schlumberger's market diversification has served as an advantage. That said, management doesn't expect the weakness in North America to continue beyond this quarter.

For now, the company is still working to further diversify its operation. One of the ways management has done this is by playing to its strengths and efficiency. For instance, even though the company did experience some operational delays in some international regions, it was encouraging that management was still able to expand margins by 134 basis points to reach 23%, which demonstrates Schlumberger's ability to make quick adjustments.

Given how well the company is performing in international markets, what this means is that North America is the only "real issue" holding back Schlumberger from dominating this industry. Management understands this. To that end, the company has increased its capital spending and has invested in research and development to uncover new drilling processes in North American markets -- whether unconventional or otherwise.

Schlumberger is aware of the race in the industry to bring more efficiency and productivity to what is known as hydraulic fracturing, or fracking. And I believe Schlumberger's HiWAY service, which blends techniques that increase the productivity of the wells by creating pathways within the proppant, which are chemicals that are used in fracking wells.

From an operational perspective, that Schlumberger's pretax operating income increased 10% sequentially was evidence that management's focus on integration, quality and efficiency, all came together this quarter. Not to mention, the better-than-expected margin improvement, which expanded by 114 basis points to 21.5%.

All told, it was a solid quarter all around. And given the improved prospects of HiWAY, investors should continue to expect sustained revenue and cash-flow growth over the next couple of quarters. With the stock now trading at 10 times 2014 EBITDA, which is at its historical average, I believe current estimates, which have not accounted for potential upward impacts of HiWAY, are too conservative. And when combined with Schlumberger's strong share buyback program, I see the stock heading to $100 in the next 6 to 12 months.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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