Schlumberger Is Heading to $90

TheStreet.com

NEW YORK (TheStreet) -- Since reaching a high of $77.84 on May 21, shares of energy giant Schlumberger have been down by as much as 10%, reaching a low of $70.25 on June 24. Since then, however, the stock has bounced back, gaining as much as 9% on virtually no news at all. (SLB closed Wednesday at $82.16.)

This pretty much explains the volatile nature of the oil services sector. Investors have had a hard time making up their minds on this sluggish industry, which has been hurt by feeble prices and soft rig counts. Although Schlumberger has been by far the leader of a group that includes rivals Halliburton and Baker Hughes , Schlumberger has had a tough time overcoming weakness in North America.

By contrast, Halliburton, which has long played second fiddle to Schlumberger, is now performing extremely well in international markets. This has begun to make the battle between the two giants all the more interesting.

In other words, the gap between the two companies is not as wide as it used to be. This has now placed Schlumberger under a microscope. Investors are now wondering if the stock, which has always received the benefit of the doubt, still deserves the same level of respect.

I believe Schlumberger answered this question. With second-quarter revenue growing 7% year over year, which significantly outperformed both Halliburton and Baker Hughes, which posted revenue growth of 1% and 3%, respectively, this should dispel any worries Schlumberger is losing its lead. As expected, last month the company posted strong gains in international markets, which grew 10% year over year and 6% from the April the quarter.

The major concern, however, has been with weakness in North America. Although this quarter Schlumberger didn't post any growth in the region on a year-over-year basis, it was nonetheless an improvement from the 3% decline posted in the April quarter. In fact, the company managed to squeeze out a decent 2% sequential gain.

It's also encouraging that management has figured out ways to offset the slowdown in North America by posting better-than-expected improvements in areas like Africa, Mideast/Asia and Russia. On a segmental basis, with production up 5%, while drilling and reservoirs characterization posted gains of 7% and 9%, respectively, I don't believe management has gotten enough credit for having effectively diversified this operation. I can't say that there is a "weak link" in any part of the business.

With each segment performing so well, it came as no surprise that operating income grew 9% year over year and 13% from the April the quarter. Even more impressive was the fact that despite the perpetual weakness in North America and the sluggishness in Latin America, management was able to grow margins both on a year-over-year basis and sequentially. Given the fragile nature of this sector, I can't take for granted how hard of an accomplishment this is, especially when Baker Hughes missed its margin estimates.

I'm not suggesting this was a blowout quarter for Schlumberger. But I do believe the company has shown plenty of signs that the worst is over and better results are on the way. If nothing else, it's reassuring that management continues to show that it can do more with less while also laying out steps to grow earnings-per-share faster than revenue. Along those lines, one of the stated goals is the company wants to establish the highest margins in North America.

It's a great goal to have. What this tells me is that it's also possible that some of the weakness Schlumberger continues to experience in North America has been of its own doing. What I mean by this is, it's not uncommon for companies to turn away business that does not meet certain margin criteria. Again, this suggests that even when the numbers may not reflect it, management is still in control.

To that end, moving forward, investors should expect better results from North America, both on a year-over-year and sequential basis. Likewise, I don't envision any drawbacks in growth regions such as Mideast/Asia, Africa and Russia.

All of this points to a very attractive stock, which I believe is heading to $90 per share.

To reach $90, the company only needs to trade at 10 times forward earnings before interest, tax, depreciation and amortization. With the stock now trading at just eight times 2014 EBITDA projections, the next couple of quarters should yield better results, which should raise these estimates higher. In the meantime, the stock seems cheap when considering that the company has not only a strong share buyback program, but also a solid dividend policy.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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