Schlumberger: Why Black Is the New Gold

Source: Thinkstock

Source: Thinkstock

Schlumberger Limited (NYSE:SLB) is one of my favorite oil plays. I much prefer it over rival Halliburton (NYSE:HAL), although they are very similar in many respects. Schlumberger just reported its earnings and I think shareholders of Halliburton should take notice. For those who do not know, Schlumberger and Halliburton are oil service stocks.

Schlumberger specifically operates through three groups: Reservoir Characterization, Drilling, and Production. The Reservoir Characterization group provides reservoir imaging, monitoring, and development services as well as wireline technology that offers open-hole and cased-hole services. This group offers production pressure and flow-rate measurement services, information solutions, such as software, consulting, information management, and IT infrastructure services that support oil and gas industry. The Drilling group designs, manufactures, and markets roller cone and fixed cutter drill bits, and drilling fluid systems, geo services, supplies engineering support, directional-drilling, measurement-while-drilling, and logging-while-drilling services. It also provides bottom hole assembly drilling tools, borehole enlargement technologies, impact tools, and tubulars and tubular services. The Production group provides well services comprising pressure pumping, well cementing, stimulation, and intervention. It also offers well completion services and equipment, such as packers, safety valves, and sand control technology.

The stock has exploded in the last few years, blowing past $100 to reach all time highs of $118 plus. It has since pulled back, and I have taken some profits, but the stock could move higher once again on the back of earnings. The company reported second-quarter revenue of $12.05 billion versus $11.24 billion in the first-quarter of 2014, and $11.18 billion in the second-quarter of 2013. Thus revenue was up 7 percent sequentially and increased 8 percent year-over-year.

The company’s income from continuing operations (excluding special charges and credits), was $1.80 billion, an increase of 13 percent sequentially and an increase of 17 percent year-over-year. Diluted earnings-per-share from continuing operations was $1.37 versus $1.21 in the previous quarter, and $1.15 in the second-quarter of 2013. This is incredible growth from such a large global company.

The pretax earnings were striking. Pretax operating income reached $2.62 billion, up 11 percent sequentially and 15 percent year-over-year. How did each region perform? Well, international led the way with pretax operating income of $1.94 billion. This was an increase of 14 percent from last quarter, while North America pretax operating income of $700 million increased 3 percent over last quarter. It was quite a quarter. Schlumberger CEO Paal Kibsgaard stated:

“Strong Schlumberger second-quarter results were driven by significantly higher activity both offshore and in key land markets. Growth was strongest internationally as activity rebounded in a number of regions but North America was also markedly higher with strength offshore and extremely solid progress on land in spite of the Canadian spring break-up. All Areas and all Groups recorded growth, underpinned by the strength of our execution and the penetration of our new technology.”

What is key moving forward for Schlumberger and Halliburton is oil and gas prices. If they drop, so will the stock. One that note, the overall global economic outlook continues to be mixed. The fundamentals for a slow recovery are still intact. The gap between oil supply and demand is narrowing because of stronger demand and oil supply which is tightening spare capacity is giving a floor support for oil prices. The same is not true fornatural gas. They are well supplied with downside pressure on prices. Overall, I still love this stock. I think it can breach $120 if the status quo of the market and oil prices remain. Watch oil prices closely. They will impact both Schlumberger and rival Halliburton’s prices heavily in the coming months.

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Disclosure: Christopher F. Davis is long Schlumberger. He has a buyrating on the stock and a $125 price target.

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