NEW YORK (TheStreet) -- Shares of the world's biggest oilfield services provider Schlumberger (SLB) - Get Schlumberger NV Report fell by 2.4% from last Tuesday to Friday due to mounting fears that the company could be the latest victim of the crises in Ukraine and Iraq. This, however, could be a buying opportunity for investors as the market have overreacted. Shares have recovered a bit since then -- up 1.6% Monday to $108.26 as of 1:45 p.m. -- but this is still a stock to buy on the dips.
This is because Schlumberger does not generate a significant portion of its total revenues from any single country outside of North America. Therefore, it is unlikely that the problems in Iraq or Russia will seriously damage the company's bottom line. The charges related to the Russian sanctions represent less than 2% of Schlumberger's earnings estimate for this quarter. Iraq's impact on the company's profits is even smaller.
Robust growth in other regions, such as the U.S. land market, Middle East and Australia could offset the declines coming from other regions. The company has predicted average earnings per share growth of between 17% and 20% each year over the next three years.
In 2014, Schlumberger's shares have risen by 20.1%. The company's shares are priced 20.8 times its trailing earnings for the last twelve months, significantly lower than the industry's average of 64.3 times, as per data compiled by Thomson Reuters.
Schlumberger has greater exposure to outside of North America than its peers. In the previous quarter ending in June, the company generated 32% of its revenues from North America. On the other hand, its biggest rivals Halliburton (HAL) - Get Halliburton Company (HAL) Report and Baker Hughes (BHI) generated 54% and 48% of their revenues from North America in the last quarter.
Due to its international exposure, Schlumberger stands to become the biggest beneficiary, with an uptake in exploration and production activity outside of North America. On the flip side, the company's operations in more than 85 countries around the world leave it exposed to political crises in those regions.
Last week, Schlumberger said that the U.S. and EU sanctions on Russia will hit its earnings by up to 3 cents a share. This made Schlumberger the first oilfield services company to cut its earnings forecast due to the sanctions on Russia.
This is going to be disappointing for shareholders, as in its last earnings conference call held in mid-July, Schlumberger's CEO Paal Kibsgaard talked about a rebound in Russian operations which contributed towards its revenue growth in the previous quarter. Moreover, Kibsgaard also predicted that due to increase in drilling activity, as well as the new contract wins in Sakhalin, a Russian island, Schlumberger could "finish the year on a strong note. "
Meanwhile, the challenging security situation in Iraq could also exacerbate Schlumberger's problems. According to analysts' estimates, the company generates $600 million of annual revenues and up to 8 cents per share in annual profits from Iraq.
Last month, Kibsgaard also talked about sluggish activity in southern Iraq, which is responsible for 90% of the country's oil production. Albeit Kibsgaard also said that the company has witnessed an uptake in activity in northern parts of the country, which could offset the losses coming from south.
Besides Schlumberger, there are several other energy companies with significant operations in Russia or Iraq, such as Exxon Mobil (XOM) - Get Exxon Mobil Corporation Report, BP (BP) - Get BP p.l.c. Sponsored ADR Report, Total (TOT) - Get Total SA Sponsored ADR Class B Report, Halliburton, Baker Hughes, Nabors Industries (NBR) - Get Nabors Industries Ltd. Report NBR and Weatherford International (WFT) - Get Weatherford International plc Report. BP, which owns 20% of the Russian energy giantRosneft (RNFTF) RNFTF, was the first energy company to announce last month that the Russian sanctions can have an adverse impact on its business. Other companies could follow in BP and Schlumberger's footsteps.
On the other hand, Schlumberger has been gaining market share in North America and is also going strong in the Middle East and Asia region, thanks to robust growth in the U.S., Saudi Arabia and Australia. In the previous quarter, the company witnessed double-digit year-over-year revenue growth from the Middle East and Asia region as well as in the U.S. land market.
Meanwhile, last week, Mexico turned its oil reforms into law, opening the country's vast energy sector to international oil companies and breaking the 76-year monopoly of the state-owned oil producer Pemex. This move could lead towards an uptake in activity in Mexico, creating additional business opportunities for Schlumberger in the long-term.
Schlumberger did not reply to email and phone messages from TheStreet requesting comment.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates SCHLUMBERGER LTD as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:
"We rate SCHLUMBERGER LTD (SLB) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, solid stock price performance and good cash flow from operations. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- SLB's revenue growth trails the industry average of 20.7%. Since the same quarter one year prior, revenues slightly increased by 7.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- The current debt-to-equity ratio, 0.33, is low and is below the industry average, implying that there has been successful management of debt levels. To add to this, SLB has a quick ratio of 1.55, which demonstrates the ability of the company to cover short-term liquidity needs.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Energy Equipment & Services industry and the overall market on the basis of return on equity, SCHLUMBERGER LTD has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
- Compared to its closing price of one year ago, SLB's share price has jumped by 28.90%, exceeding the performance of the broader market during that same time frame. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
- SCHLUMBERGER LTD's earnings per share declined by 17.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, SCHLUMBERGER LTD increased its bottom line by earning $5.11 versus $3.91 in the prior year. This year, the market expects an improvement in earnings ($5.70 versus $5.11).
- You can view the full analysis from the report here: SLB Ratings Report