SLB Schlumberger Ltd

This prompted analysts to revise their estimates significantly higher for both 2011 and 2012, sending the stock to a Zacks #2 Rank (Buy).

With heightened fears of another recession looming, however, shares have pulled back considerably from their 52-week highs. If the recessionary fears are overblown though, then Schlumberger looks very attractive at just 14.4x forward earnings.

Company Description

Schlumberger provides a wide range of services from exploration through production to the oil and gas industry. It reports its results in 4 main segments:

Reservoir Characterization: (25% of total revenue)
Drilling: (36%)
Reservoir Production: (32%)
Distribution: (7%)

The company was founded in 1926 and has a market cap of $95.6 billion.

Second Quarter Results

Schlumberger reported better than expected results for the second quarter of 2011. Earnings per share came in at 87 cents, beating the Zacks Consensus Estimate by 2 cents. It was a 28% increase over the same quarter in 2010.

Total revenue rose 62% year-over-year and 10% sequentially to $9.621 billion, ahead of the Zacks Consensus Estimate of $9.209 billion. The Reservoir Production segment saw a 13% increase in revenue quarter-over-quarter on higher pricing and capacity additions. Reservoir Characterization revenue rose 12% over the same period.

The growth was strong across all geographies, including an 11% increase in North America, a 14% increase in Latin America and a 12% increase in the Middle East and Africa.

The cost of revenue rose from 78.4% to 79.4% of total revenue while operating income increased 38% year-over-year.

Outlook

Management gave a bullish outlook for the company in its second quarter press release. The company stated that governments around the globe are ramping up production for oil and gas amid the political uncertainty in order to maintain an adequate supply cushion. This bodes well for Schlumberger.

Barring a recession, the company expects this trend to continue.

Analysts revised their estimates significantly higher for both 2011 and 2012 off of the strong quarter, sending the stock to a Zacks #2 Rank (Buy).

The Zacks Consensus Estimate for 2011 increased to $3.83, which corresponds with 34% growth over 2010 EPS. The 2012 consensus estimate is currently $5.48, equating to 43% EPS growth.

Earnings estimates have not fallen recently despite the weak stock market and heightened recession fears.

Returning Value to Shareholders

Schlumberger generates strong free cash flow and has been rewarding its shareholders through stock buy backs and dividend increases. The company repurchased 8.2 million shares of its stock in the second quarter for a total of $706.7 million. It also pays a dividend that yields 1.4%.

Since 2000, the company has increased its dividend at a compound annual growth rate of 9.3%, including a 19% hike earlier in the year:

Valuation

Shares have pulled back more than 25% from their 52-week high during the recent stock market correction. This has lead to some compelling valuation, however.

Shares trade at just 14.4x 12-month forward earnings, essentially in-line with the industry average, but a significant discount to its 10-year median of 22.3x.

Its price to book ratio of 3.0 is also well below its historical median of 5.0.

The Bottom Line

If another recession is right around the corner, then a stock like Schlumberger is one to avoid. If these fears are overblown, however, Schlumberger looks attractively priced at just 14.4x forward earnings, given the bullish outlook by management and rising earnings estimates.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research.

 
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