Battle of the Oil Services Titans
Energy services companies fulfill every imaginable need for energy producers.
They provide services that range from equipment sales and maintenance, to drilling, transport, logistics, and reservoir mapping.
Basically, these companies represent the “operations and technology” side of the business.
The great thing about this industry is that it’s relatively resilient to price swings. After all, energy services are needed whether oil is at $100 or $40.
These firms will get bruised by a drop in production caused by low prices. But since exploration, drilling, and maintenance will continue globally, there won’t be any lasting scars.
Now, there are three major companies that dominate the energy services space. But which one is the ultimate champion?
Starting With the Biggest
The biggest player in the energy services space is Schlumberger (SLB), a company founded by the scions of two brothers who had a keen interest in finding out what was underground and how to get to it.
Today, the publicly traded company produces over $48 billion in revenue, employs more than 120,000 people, and has operations in every oil-producing region in the world.
A few weeks ago, Schlumberger reported earnings and revenue that topped expectations. Margins and global operations were strong, too. The company also announced a whopping increase of 25% in its quarterly dividend, something that caught investors and analysts off guard. (In this environment, most would expect cuts!)
Schlumberger has a lot of faith in itself, too. It bought back more than 12 million shares in the last quarter, spending over $1 billion to buy them at an average price of $90 per share – 10% higher than where they trade today.
Plus, the company is looking to expand. Last week, it made an offer of $1.7 billion for a Russian drilling company, trying to buy assets on the cheap.
Overall, Schlumberger is showing tremendous strength. Even though many would argue that the firm is making all the wrong moves at the wrong time.
A Powerful Combination
Halliburton, the second-largest energy services company, is in the process of buying Baker Hughes in a $35-billion deal.
The combined entity will become the No. 1 player in the space… at least for a while.
You see, Halliburton will have to divest several businesses that will bring revenue in just below Schlumberger once everything is said and done. But the two companies will be equal in size.
These two companies will soon be on an even playing field. That is, until you look at their market caps…
Betting on the Favorite
Schlumberger’s market cap is one-third more than the other two companies’ market caps combined. Its share price, while lower, has fallen much less than Halliburton’s, which has dropped almost 45% since hitting a 52-week high of $74.33.
The energy services leader has also seen its share price fall around 30%, but it sports a higher market cap because it makes more money than the other two combined! And it does so with lower revenue. Schlumberger made more than $7 billion in 2014, compared to just over $4 billion made by both Halliburton and Baker Hughes.
Now, neither Schlumberger nor Halliburton-Baker Hughes will make more in 2015 than they did in 2014. But Schlumberger may emerge in better shape than the Halliburton-Baker Hughes combo.
For several reasons…
First, it’s much stronger financially. I don’t necessarily agree with Schlumberger’s decision to raise dividends in the face of headwinds, but it does have the cash to do so. It also has a stronger balance sheet, less debt, and more cash. These are all good things in a period of uncertain growth.
The Halliburton-Baker Hughes combination will be a significant competitor in the field. But the new company will be weighted down with debt, and will have to deal with integration issues for a couple of years.
And while Halliburton is looking fit at current prices, the timing of the deal was not in its favor. The deal was announced when the price of oil was much higher, around $80 per barrel. With prices where they are now, it looks like Halliburton overpaid. And they’re also on the hook for $3.5 billion if the deal doesn’t go through.
Oil prices may head lower still, but if you’re looking for a strong company in the services and technology sector, then your best bet is Schlumberger. A good entry point for buyers would be in the low $70s. A great entry point would be in the $60s.
And the chase continues,
P.S. Today, America is on the verge of energy independence. And there’s no doubt that it will lead the way for growth in the next decade. But is that enough to launch the country into a new Golden Age? That’s the question Wall Street Daily’s Chief Resource Analyst Karim Rahemtulla – along with over two dozen top investment experts – will answer this coming March in St. Petersburg, Florida. The Oxford Club’s 17th Annual Investment U Conference will be held there from March 11 to 14. Click here now for the details.