NEW YORK (TheStreet) -- The oilfield-services stocks are likely to bear the brunt of plummeting crude prices, but Schlumberger (SLB) , which generates more annual revenue than any other company in this space, is in a strong position to weather the storm.
This is due, in part, to the Houston, Texas-based company's financial health, large geographic footprint and the changing industry dynamics related to Halliburton's (HAL) acquisition of Baker Hughes (BHI) .
Futures prices for benchmark Brent and WTI crude oil have tumbled by nearly 32% over the last three months and are hovering near multiyear lows. The pricing environment could remain challenging over the next six months "at a minimum," wrote Topeka Capital Market's analyst Gabriele Sorbara in a Dec. 8 report.
Following OPEC's decision to maintain its existing levels of production, U.S. oil producers will likely respond by following in the footsteps of ConocoPhillips (COP) and Continental Resources (CLR) and reducing capital expenditure plans for 2015. In a Nov. 28 report, Goldman Sachs's energy analysts, led by Brian Singer, predicted an uptick in capital expenditure announcements through February.
The capital expenditure cuts would lead to a slowdown in drilling activity, which could affect several energy sectors, with the oilfield-services group being one of the hardest hit, according to Goldman Sachs. Not surprisingly, the Market Vectors Oil Services ETF (OIH) , which tracks more than two dozen oilfield services companies, has dropped by nearly 70% over the last three months. Schlumberger has also fallen by 19% in the same period.
So far this year, Schlumberger is down 6.5% and currently trades around $84.21. Analysts at Jefferies recently downgraded the stock to "hold," alongside a number of other energy stocks.
That said, the recent pullback over the last few months has only made Schlumberger more attractive.
The company has a strong balance sheet, which is evident in its below-average long-term debt-to-equity ratio and above-average current ratio, according to data compiled by Thomson Reuters. The former metric is used to measure leverage while the latter is a measure of liquidity. For debt-to-equity ratios, the shorter the better, while the opposite is true for the current ratio.
Moreover, Schlumberger generates more cash than it spends in capital expenditures. Therefore, Schumm predicts that the company will further strengthen its balance sheet next year, even though it will spend $5 billion on share buybacks.
Besides its financial health, Schlumberger also benefits from having exposure to Latin America and Middle East, which is a factor Goldman Sachs says investors should look for before buying oil services stocks. This is because the two regions represent the fastest-growing markets, which could outperform the U.S. in 2015.
Schlumberger generates nearly 40% of its annual revenue from Latin America, Middle East and Asia. From these markets, the company will generate more revenues this year than the combined total of Halliburton and Baker Hughes, according to Oppenheimer.
Further, the merger between Halliburton and Baker Hughes, two of Schlumberger's nearest competitors in terms of revenue, could benefit Schlumberger in two ways.
First, the merger process, which includes an antitrust review followed by integration of the two companies, could take a couple of years, Schumm estimates. This could give Schlumberger an opportunity to expand its market share during this period.
Second, although a larger Halliburton will be in a better position to compete with Schlumberger, the removal of Baker Hughes from the market will create a virtual duopoly. This is particularly true for some of the key areas such as such as mature oil and gas fields and sea-based drilling and well completions. The decrease in competition will likely have a favorable impact on pricing, Schumm wrote.
Lisa Hoffman, a Schlumberger representative, was not available for comment.
At the time of publication, the author held no positions in any of the stocks mentioned.
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, growth in earnings per share, good cash flow from operations and increase in net income. We feel these strengths outweigh the fact that the company shows low profit margins."
You can view the full analysis from the report here: SLB Ratings Report