Analyst Still Sees 50% Upside in Schlumberger

Schlumberger Ltd. (NYSE: SLB) received mixed news from independent research firm Argus after it reported earnings for its third quarter. As oil service companies and drillers saw their shares gutted over the past six weeks, they have only just started to recover. In the case of Schlumberger, it is about a 5% recovery from the recent lows, but that is after shares were at $100 at the end of August to recently as low as $89 or so.

Schlumberger reported third-quarter earnings of $1.49 per share, up from the previous year’s $1.29. That beat the consensus estimate of $1.46, but it missed Argus’s estimate of $1.55 per share.

Looking ahead, Argus forecasts that Schlumberger will have compound earnings per share growth of 17% to 20% through 2017. However, for the near future, Argus is lowering the 2014 earnings per share estimates due to a miss on the third quarter and the likely impact of conditions in Libya and Iraq and of Russian sanctions.

The company expects to boost its return on capital employed (ROCE) by over 400 basis points to above 20%, and Argus considers this conservative and very achievable.

Schlumberger’s operations are organized into three segments:

• In the Production group, revenue rose 17% year-over-year to $4.70 billion and pretax income increased by 21% to $857 million. The pretax margin rose 600 basis points to 18.2%.
• In the Drilling group, revenues rose 11% year-over-year to $4.82 billion, and pretax operating income increased by 18% to $1.05 billion. The pretax margin rose 130 basis points to 21.7%.
• In the Reservoir Characterization segment, revenue fell 3% year-over-year to $3.18 billion and operating income fell 3% to $954 million. The operating margin remained flat at 30.0%.

Argus has reiterated its Buy rating for Schlumberger, but it lowered its target price to $145 from $150. Given the $94.10 share price, this still implies upside of 54%. Neither Argus nor other research shops are well known for having upside targets that imply gains of 50% or more. Schlumberger’s stock has a consensus analyst price target of $123.36 and a 52-week trading range of $84.91 to $118.76.

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