NEW YORK (TheStreet) -- Rising oil prices have taken a meaningful chunk out of household budgets. With many U.S. cities already seeing gas prices spike north of $4 per gallon, things may only get worse, especially with geopolitical issues bringing uncertainty to the oil market.
The stock closed Tuesday at $114.46, up 27% on the year to date, doubling the energy sector's 14% gain. In the trailing 12 months, Schlumberger has rewarded investors with 51% gains, also outperforming the sector's 28% gain during that span.
With so much money on the table, investors are anxious for a quick resolution to the violence in Iraq. These concerns are valid.
Schlumberger management isn't worried, however. In fact, since the conflict began the stock has been up by almost 15%. The reason? Management has communicated a clear and comprehensive multi-year growth plan towards 2017.
The main drivers of growth will come from the company's drilling and production technology. Management has spoken favorably about integration capabilities and what it calls "best-in-class operations and technology." The company intends to drive a wedge between itself and its peers like Halliburton (HAL), Baker Hughes (BHI).
The entire industry has been under significant pricing pressure due to, among other things, weak oil prices, cost inflation and slumping production levels. Schlumberger wants to use its growing free cash flow to make the sort of efficiency improvements needed to outgrow the market and widen the gap lead.
To that end, by 2017 Schlumberger is targeting earnings between $9 and $10 per share, which would result in a compound annual growth rate of roughly 17% to 20%. Analysts haven't yet modeled for that far ahead. Current estimates for full-year 2014 is for $5.70 a share and the company earned $4.75 in 2013.
So if you are calling management's growth estimates "ambitious," you would be correct. But over the past several decades there have been very few times this company has failed to execute on its vision. It's not going to start now.
Management, which has factored 3% to 4% growth in GDP, knows what it is getting into. Nor is it ignoring the potential geopolitical impacts such as what is currently taking place in Iraq.
Iraq is the fastest-growing oil producer outside the U.S. and is OPEC's No. 2 oil producer, generating anywhere from 3.3 million barrels per day. Schlumberger has meaningful exposure in that region, which means that any potential disruption in the physical oil supply would have an adverse impact on its long-term plans.
Unlike its peers, Schlumberger is the only company willing to guide that far ahead. What's more, not only does its three-year guidance exceed its peer comparisons in the S&P 500 but buying the stock at this point comes with significantly less risk. This is because the company is still buying back its own stock while boosting its dividend, currently at a 60% payout ratio.
The other thing investors must remember is this: As aggressive as the company's earnings estimates may appear, Schlumberger only needs to grow its revenue at a 7% annual rate in the next three years to be successful. This is 36% lower than the 11% revenue growth it averaged in the last three years. This means management has figured out ways to make more money without working as hard thanks to technology.
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.
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 a number of strengths, 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 solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, revenue growth and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows low profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Powered by its strong earnings growth of 34.44% and other important driving factors, this stock has surged by 51.48% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, SLB should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- SCHLUMBERGER LTD has improved earnings per share by 34.4% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. 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).
- The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Energy Equipment & Services industry average. The net income increased by 26.4% when compared to the same quarter one year prior, rising from $1,259.00 million to $1,592.00 million.
- Despite its growing revenue, the company underperformed as compared with the industry average of 10.9%. Since the same quarter one year prior, revenues slightly increased by 6.3%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The current debt-to-equity ratio, 0.31, 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 1.58, which demonstrates the ability of the company to cover short-term liquidity needs.
- You can view the full analysis from the report here: SLB Ratings Report