Schlumberger's Still Leading the Way

NEW YORK (TheStreet) -- Since reaching a new 52-week high of $94.91 following a strong October quarter, shares of oil services giant Schlumberger (SLB) have been under pressure,  falling by as much as 10.5% and lagging both Halliburton (HAL) and Baker Hughes (BHI). There's been no clear explanation for this.

Schlumberger stock closed Wednesday at $88.89 and the stock is down 1.4% for the year to date.

Since I began recommending Schlumberger stock in May of last year (when shares traded in the $40s), Schlumberger's story hasn't changed. In fact, the entire industry, hurt by weak oil prices and soft rig counts (among other things), has not only reached bottom but I believe there's been a drastic boost in overall demand.

With Schlumberger's stock giving up gains just as the sector takes a turn for the better, it seems investors have decided it's better to buy the industry's laggards instead of its leaders. I don't believe this makes much, if any, sense in this case. Overall energy conditions are improving. Schlumberger, which has a high-performing joint venture with Cameron International (CAM) called OneSubsea, has the tools and capabilities to differentiate itself from its peers, particularly from an innovative perspective.

On Friday, the company will report its fourth-quarter and year-end results. The way I see it, investors have to have been completely blind to not already appreciate what this management team has done in a relatively short period of time. The Street, meanwhile, which expects close to 8% year-over-year revenue growth and a 23% jump in earnings, demands more. These targets, if reached, will be no small accomplishment. Still, I wouldn't focus solely on these near-term metrics.

The important thing to remember here is industry oil prices have finally begun to stabilize, which should add a meaningful boost to long-term demand for Schlumberger's services. Plus, unlike Halliburton, which generates roughly 50% of its revenue in the U.S., the U.S. accounts for only a third of Schlumberger's revenue and profits.

What this means is Schlumberger generates a significant portion of its business from international markets. Schlumberger's third quarter, which produced year-over-year revenue growth of 7% and 3%, respectively, for North America and internationally, demonstrated the advantage the company has from a well-diversified business.

What this showed was that even with the ongoing pricing weakness in the U.S., Schlumberger's international presence allowed management to expand third-quarter margins by 134 basis points to reach 23%. This tells me Schlumberger has the tools in place to make quick/necessary adjustments while the company's results affirm Schlumberger's leadership in multiple sectors and geographies.

To the casual observer, these numbers may not impress. From an operational perspective, though, there's no denying Schlumberger remains a cut above both Halliburton and Baker Hughes in terms of quality and efficiency. There's no other way to explain the 114-basis-point improvement in operating margin despite operational delays in various international regions. Essentially management played to its strengths. But the company's not done.

Schlumberger management continues to reinvest capital in areas such as research and development. The company is fulfilling its undying commitment to find new ways to improve the drilling processes in North American markets, both conventional and unconventional.

Last but not least, on Friday, investors should pay special attention to what management says about the OneSubsea joint venture. Let's not forget that the October quarter was the first time management opted to not record revenue from that business, which had an impact on Schlumberger's overall revenue growth by roughly 1.2%.

The bottom line is this: While the fortunes of Halliburton and Baker Hughes should improve commensurately, I believe it's always better to buy a market leader in a recovering industry, especially when the fundamentals are improving. To that end, no one does it better than Schlumberger in the energy/oil services space.

With shares now trading at around $88, roughly 10 times 2014 Ebitda, Schlumberger stock remains a strong buy ahead of earnings on the basis of sustained revenue and cash-flow growth over the next 18 to 24 months. The good news is that this growth also coincides with the company's strong share buyback program.

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

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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