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Why share buyback programs support oilfield service stock prices

Ingrid Pan, CFA

Why some oilfield service companies are well positioned for growth (Part 7 of 10)

(Continued from Part 6)

Share buybacks

Share buyback programs signal that companies are generating significant positive free cash flow, and in addition to pursuing growth projects, they also view returning money to shareholders as one of the best ways to maximize investor returns. Halliburton and Schlumberger have both commented that they would continue to opportunistically buy back shares, which provides support to stock prices. Baker Hughes noted it was open to the idea if free cash flow remained positive. Share buybacks are broadly positive signals for these OFS companies’ stock prices.

Quotes from 2Q13 conference calls

Halliburton (HAL)

“We bought back $1 billion of shares in the second quarter and today announced an additional repurchase authorization to a total of $5 billion. These actions reflect our growing confidence in the strength of our business outlook and our ability to not only increase our buybacks, but our dividends, while leaving room for any capital spending or additional acquisitions we may want to do.”

“During the second quarter, we upsized our revolving credit facility from $2 billion to $3 billion and used the excess liquidity that transaction created to repurchase 23 million shares of common stock. Last week, our Board of Directors approved increase in the authorization for future share repurchases to $5 billion. We are currently evaluating the best available repurchase methods. This increased authorization, together with the 39% increase in dividends announced in the first quarter is a reflection of our growing confidence and the strength of our business outlook and our continuing commitment to shareholder distributions.”

Schlumberger (SLB)

“Yesterday, our Board of Directors approved a new $10 billion share repurchase program to be completed at the latest June 30, 2018. Our strong projected cash flow over the next five years allows us to increase the level of share buybacks, while also maintaining enough flexibility to continue to take advantage of growth opportunities.”

In response to a question regarding the pace of buybacks, Schlumberger explained, “Well, as I mentioned in my remark, that the buyback is basically a balancing number for us when it comes to utilization of the cash flow. And you’re right in your assumption of the cash flow. That’s why we said latest by 2018. So if the cash flow proved to be significantly better than what we have factored in the five-year scenario in making the $10 billion program, we will accelerate it. We did this in the past. We look at our excess cash over a period of time, taking into consideration the growth that we are anticipating in terms CapEx, and as I said, investment in future revenue stream activity, be it multiclient or production incentive contracts, and any balance will go into the buyback, yes.”

SLB can buy up to $10 billion in shares back over the next five years. If excess cash flow is significantly better than expected, the pace of the buyback will accelerate.

Baker Hughes (BHI)

In response to a question regarding whether BHI would begin stock buybacks in the same vein as SLB and HAL, the company answered, “We review this every quarter with the Board. The good news is we now have something to talk about. Before, we haven’t been free cash flow positive on a regular basis. We weren’t free cash flow positive in the first quarter. So this is a pretty strong quarter for us. We’re expecting future quarters to continue to deliver free cash flow and when that starts to be delivered on a reliable basis, we will be in a position to be able to consider shareholder distributions.”

Continue to Part 8

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