Schlumberger (OP/A): Raising estimates + fair value to $107
Goldman Sachs July 24, 2005
We are raising our 2005-07 EPS estimates for SLB to $3.20/ $4.30/ $4.90 from $2.83/ $3.45/ $3.95 due to (1) stronger 2Q2005 EPS of $0.78 vs our $0.67 estimate, (2) 2005 E&P spend now estimated +20% vs +15% previously, and (3) stronger incremental margins of 40-45% vs ~35% previously as non- N.Am oilfield pricing has hit a major inflection. We are also raising our fair value estimate to $107 (25x 2006 PE) from $95 despite a 10% reduction in our fair value multiple resulting from a higher ROCE + our view that multiples + returns should be inversely correlated for a cyclical group like oil services. We continue to see more upside than downside to our new estimates + rate SLB OP/A for its premium non-N. Am franchise, higher than industry avg exposure to a pickup in exploration activity, strong mgt and reasonable valuation.
SLB + HAL INCREMENTAL MARGINS OF + 40% DEMONSTRATE VERY STRONG INDUSTRY FUNDAMENTALS
SLB (ex seismic) 2Q05 seq/y-y incremental margins of 43.1%/42.3% were fairly comparable to HAL (ESG) incrementals of 44.6%/41.5%. Revenue rose 9.8% sequentially and 20.1% y-y and was 6% above our estimate. In contrast, HAL 2Q05 oilfield revenue rose 13.1% sequentially and 29.8% y-y and was also 6% above our estimate. SLB operating income rose 20.6% sequentially and 48.5% y-y with margins +198 bps sequentially and +422 bps y-y. In contrast, HAL oilfield profit was +29.5% sequentially and +94.1% y-y with margins +267bps sequentially and +700 bps y-y. SLB oilfield margin was 176 bps above our estimate while HAL was +231 bps.
Exhibit 1: TRENDS IN 2Q2005 OILFIELD REVENUE/EBIT- SLB VS HAL seq chg y-y chg chg vs GS est
Quarterly Revenue
SLB (EX GECO) 9.8% 20.1% 6.1%
HAL (ESG) 13.1% 29.8% 6.4%
Quarterly EBIT
SLB (EX GECO) 20.6% 48.5% 15.3%
HAL (ESG) 29.5% 94.1% 19.5%
EBIT margins (bps)
SLB (EX GECO) 198 422 176
HAL (ESG) 267 700 231
Revenue/rig
SLB (EX GECO) 18.0% 6.0% 6.6%
HAL (ESG) 21.6% 14.6% 8.2%
Company reports and Goldman Sachs Research estimates
STRENGTH VISIBLE IN MOST GEOMARKETS REFLECTING A MORE BALANCED UPCYCLE
SLB LAM revenue was +15.8% vs. our estimate with Middle East Asia (+6.2%), Europe/Africa (+5.6%) and NAM essentially in line. Higher margin IPM (Integrated Project management) revenues helped LAM results. Middle East and Russia markets continue to offer growth potential.
Exhibit 2: REGIONAL REVENUE TRENDS - SLB VS HAL
NAM Revenue
SLB (EX GECO) 5.6% 19.9% 1.4%
HAL (ESG) 7.4% 34.4% -0.7%
Europe/Africa Revenue
SLB (EX GECO) 9.9% 17.2% 5.6%
HAL (ESG) 37.8% 42.3% 25.3%
Latin America Revenue
SLB (EX GECO) 18.1% 33.2% 15.8%
HAL (ESG) 6.1% 29.6% 5.7%
Middle East/Asia Revenue S
LB (EX GECO) 9.4% 14.9% 6.2%
HAL (ESG) 8.7% 7.9% 6.2%
Company reports and Goldman Sachs Research estimates
SLB LAM op income was also impressive +22.1% vs. our estimate with Middle East Asia (+14.4%), Europe/Africa (+15.8%) and NAM (+13.4%).
Exhibit 2: REGIONAL OP INCOME TRENDS - SLB VS HAL
NAM Op Income
SLB (EX GECO) 16.8% 103.5% 13.4%
HAL (ESG) 17.5% 90.1% 15.7%
Europe/Africa Op Income
SLB (EX GECO) 24.2% 31.6% 15.8%
HAL (ESG) 64.1% 303.8% 37.6%
Latin America Op Income
SLB (EX GECO) 31.3% 33.3% 22.1%
HAL (ESG) -27.8% 8.3% -28.4%
Middle East/Asia Op Income
SLB (EX GECO) 18.4% 28.0% 14.4%
HAL (ESG) 89.4% 56.1% 58.2%
Company reports and Goldman Sachs Research estimates
WHILE 2Q05 RESULTS ARE UNDENIABLY BULLISH WHAT ARE THE KEY RISKS HERE?
(1) Cost inflation - in particular labor and material
(2) Oilfield capacity additions - While capex growth commentary remains muted, this is something to keep our eyes on - particularly as we approach/exceed replacement cost economics
(3) Sharp pull back in oil and gas prices (perhaps to sub $30 barrel level)
(4) Significant slowdown in global oil/gas demand
I, Terry Darling, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. |
