Shares of Schlumberger (NYSE:SLB) rallied ahead of its third-quarter report, but the expectations were a bit too optimistic.
The largest oil services company earned 98 cents a share before items, which was below the Wall Street consensus of $1.01 a shares.
Yet Schlumberger continues to grow at a hefty clip – quarterly revenue spiked by 49%.
Is the stock a good value? Let’s take a look at the pros and cons:
Pros
Global Powerhouse. Schlumberger has operations in more than 80 countries, and its services span across all the major areas of oil services, like seismic measuring, drilling measurements, well services and project management.
But there are also some high-tech offerings, including geological surveillance, 3-D modeling and next-generation sensors.
Growth opportunities. There are several areas that should be strong drivers for Schlumberger. One is the explosion of shale exploration and production in North America. In fact, it looks like there may even be opportunities in Europe and South America.
What’s more, there has been a ramp-up of activity in the Gulf of Mexico, which should continue to be a driver.
Solid balance sheet. Schlumberger has $6.3 billion in cash, with short-term debt of $2.7 billion. As a sign of its strength, the company recently borrowed $1.1 billion – in a five-year note – at an interest rate of only 1.95%.
Schlumberger has also been aggressively buying back its shares. The amount is likely come to about $4.2 billion for 2011.
Cons
Oil price. As the economies in the U.S. and Europe falter, the price of crude has been extremely volatile. This can make it tough for oil producers to plan their projects as well as find consistent profits. As a result, there may be more pressure on margins for oil services providers.
Geopolitics. In today’s world, oil is often found in areas where governments are unstable. Schlumberger had to shut down its operations in Libya because of the revolution. It turned out to be fairly costly for the company and was a key reason for the weak profits in the latest quarter.
Competition. Even though the oil services field is highly consolidated, the competitive environment is still tough. Schlumberger must contend with big operators like Halliburton (NYSE:HAL), Weatherford International (NYSE:WFT), Baker Hughes (NYSE:BHI) and Core Laboratories (NYSE:CLB).
Verdict
Even as the world economies slow, the next couple years look promising for Schlumberger. The fact is that oil supplies remain tight and demand still continues to rise, especially from Asian countries.
Besides, major oil producers – like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) – realize they need to continue to find new sources of reserves. In fact, there have been a variety of major oil discoveries, which will certainly need the assistance of companies like Schlumberger.
In other words, as long as we avoid deep global recession, growth should remain robust. The pros outweigh the cons for the stock.
Tom
Taulli runs the InvestorPlace blog “IPO Playbook,” a site dedicated to the hottest news and rumors about initial public offerings.
He is also the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter @ttaulli. As of this writing, he did not own a positioning any of the stocks named here.
