Schlumberger Slips in North America, but Stock Priced Well

NEW YORK ( TheStreet) -- I was recently asked how a stock like Schlumberger ( SLB) that trades at twice the price-to-earnings ratio of a dominant company like Exxon Mobil ( XOM) can be considered cheap, especially because Schlumberger's P/E of 18 is already a point higher than the industry average?

The energy sector has been extremely volatile, but Schlumberger has always carried this sort of premium, even over formidable rivals such as Halliburton ( HAL) and Baker Hughes ( BHI). But Schlumberger has shown no immunity to sluggish oil prices and weak rig counts -- the same issues that has impacted the industry.

Nevertheless, given Schlumberger's market-leading position, investors were always willing to pay more. Given how well Halliburton is now performing in international markets, has Schlumberger's weakness in North America narrowed the gap between the two rivals? And does Schlumberger still deserve its premium?

Despite Weakness, First Quarter Was No Calamity

Oilfield service revenue arrived at $10.67 billion, up 8% year over year, but down 5% sequentially. Schlumberger was hurt by slower-than-expected demand along with increased competition, which resulted in the revenue miss -- albeit marginally. Still, Schlumberger's performance in North America stood out like a sore thumb.

Even though demand was a bit soft across all geographies (relative to expectations), North America's 3% decline in revenue hurt considerably. As with Halliburton and Baker Hughes, slumping oil prices have been an issue for some time. Although a case can be made that the 3% decline is much better than Halliburton's 11% drop in North America, Halliburton has significantly more exposure than Schlumberger.

Schlumberger did well in areas like Mideast/Asia, which posted 22% surge in revenue. There was a 9% increase in Latin America and Europe/Russia/Africa.

Although drilling revenue rose 9% year over year, the drilling business was actually flat from the fourth quarter. Similarly, production revenue arrived up 7% year over year, down 4% sequentially. The same pattern was seen in the reservoir business, up 8%, but down 11% from the fourth quarter.

Excluding charges and credits, income from continuing operations advanced 4% year over year, down 6% sequentially. Diluted earnings-per-share from continuing operations arrived 7 cents lower than in the fourth quarter, 5 cents better year over year.

Schlumberger posted pretax operating income of $2 billion, a 4% year-over-year increase but down 6% sequentially. Again, this is where the weak North American performance hurt the company this quarter with a 19% decline in operating income on softer margins, while Schlumberger grew operating income in all other geographies.

Moving Forward

The results weren't extraordinary, but given the overall tenor of the industry, which has been marred by poor oil prices and sluggish rig counts, it's hard to not look on the bright side and expect better performances going forward. It's worth asking if the sequential results are a sign of a worsening situation or was last year really as bad as it was perceived to be.

Schlumberger performed excellently year over year in areas such as Mideast/Asia and Latin America. This was reflective of the company's potential in international markets, where it is outpacing Baker Hughes and Halliburton.

But Halliburton posted 21% surge in international business, a second consecutive quarter of 20%-plus growth following an abysmal third quarter in which international revenue declined 5%. Schlumberger is still the leader in this area, but Halliburton is making things more interesting.

Here's Making Sense

The weak performance in North America notwithstanding, Schlumberger remains a solid play in the oil service sector, especially after previously laying out steps to grow earnings per share faster than revenue. Management once said it wants to establish the highest margins in North America. I do wonder, though, to what extent Schlumberger will go to achieve this goal.

Given how low North American revenue arrived this quarter, it's not uncommon for companies to turn away business that does not meet certain margin criteria. I still think the stock is attractive at these levels. Not only does the company have a strong share-buyback and dividend policy, but if Schlumberger can trade at 10 times forward EBITDA, the stock can reach $90 per share. Who wouldn't take a 20% to 25% premium? So yes, the stock is still cheap.

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.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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