Monday, August 25, 2014

Buy Schlumberger on the Dip; Don't Worry About Iraq, Russia Exposure

This article was originally published by TheStreet on August 18, 2014
NEW YORK (TheStreet) -- Shares of the world's biggest oilfield services provider Schlumberger (SLB_) fell by 2.4% from last Tuesday to Friday due to mounting fears that the company could be the latest victim of the crises in Ukraine and Iraq. This, however, could be a buying opportunity for investors as the market have overreacted. Shares have recovered a bit since then -- up 1.6% Monday to $108.26 as of 1:45 p.m. -- but this is still a stock to buy on the dips.
This is because Schlumberger does not generate a significant portion of its total revenues from any single country outside of North America. Therefore, it is unlikely that the problems in Iraq or Russia will seriously damage the company's bottom line. The charges related to the Russian sanctions represent less than 2% of Schlumberger's earnings estimate for this quarter. Iraq's impact on the company's profits is even smaller.

Robust growth in other regions, such as the U.S. land market, Middle East and Australia could offset the declines coming from other regions. The company has predicted average earnings per share growth of between 17% and 20% each year over the next three years.
In 2014, Schlumberger's shares have risen by 20.1%. The company's shares are priced 20.8 times its trailing earnings for the last twelve months, significantly lower than the industry's average of 64.3 times, as per data compiled by Thomson Reuters.
Schlumberger has greater exposure to outside of North America than its peers. In the previous quarter ending in June, the company generated 32% of its revenues from North America. On the other hand, its biggest rivals Halliburton  (HAL_) and Baker Hughes  (BHI_) generated 54% and 48% of their revenues from North America in the last quarter.
Due to its international exposure, Schlumberger stands to become the biggest beneficiary, with an uptake in exploration and production activity outside of North America. On the flip side, the company's operations in more than 85 countries around the world leave it exposed to political crises in those regions.
Last week, Schlumberger said that the U.S. and EU sanctions on Russia will hit its earnings by up to 3 cents a share. This made Schlumberger the first oilfield services company to cut its earnings forecast due to the sanctions on Russia.
This is going to be disappointing for shareholders, as in its last earnings conference call held in mid-July, Schlumberger's CEO Paal Kibsgaard talked about a rebound in Russian operations which contributed towards its revenue growth in the previous quarter. Moreover, Kibsgaard also predicted that due to increase in drilling activity, as well as the new contract wins in Sakhalin, a Russian island, Schlumberger could "finish the year on a strong note. "
Meanwhile, the challenging security situation in Iraq could also exacerbate Schlumberger's problems. According to analysts' estimates, the company generates $600 million of annual revenues and up to 8 cents per share in annual profits from Iraq.
 Last month, Kibsgaard also talked about sluggish activity in southern Iraq, which is responsible for 90% of the country's oil production. Albeit Kibsgaard also said that the company has witnessed an uptake in activity in northern parts of the country, which could offset the losses coming from south.
Besides Schlumberger, there are several other energy companies with significant operations in Russia or Iraq, such as Exxon Mobil (XOM_), BP  (BP_), Total  (TOT_), Halliburton, Baker Hughes, Nabors Industries  (NBR_) NBR and Weatherford International (WFT_). BP, whichowns 20% of the Russian energy giantRosneft  (RNFTF_) RNFTF, was the first energy company to announce last month that the Russian sanctions can have an adverse impact on its business. Other companies could follow in BP and Schlumberger's footsteps.
On the other hand, Schlumberger has been gaining market share in North America and is also going strong in the Middle East and Asia region, thanks to robust growth in the U.S., Saudi Arabia and Australia. In the previous quarter, the company witnessed double-digit year-over-year revenue growth from the Middle East and Asia region as well as in the U.S. land market.
Meanwhile, last week, Mexico turned its oil reforms into law, opening the country's vast energy sector to international oil companies and breaking the 76-year monopoly of the state-owned oil producer Pemex. This move could lead towards an uptake in activity in Mexico, creating additional business opportunities for Schlumberger in the long-term.
Schlumberger did not reply to email and phone messages from TheStreet requesting comment.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.