Schlumberger Strategic Review: Stronger for Longer

MS:

 

Schlumberger is being added to Morgan Stanley’s Best Ideas list. We find it difficult to envision an oil-driven capex upcycle – which we do expect – without SLB leading the way.

The framework for a new oil-driven cycle is now in place, in our view. The oil services industry will be challenged by more remote operations, deeper waters, more difficult logistics and increasingly complex geological settings with greater degrees of temperature and pressure. What’s more, the industry must handle more difficult types of hydrocarbon and the increasingly complex task of turning resources into reserves, and reserves into production. In our view, SLB is in an enviable position to benefit disproportionally from these challenges. SLB has the most advanced technology portfolio (enhanced by the recent acquisitions of Smith and Geoservices), some of the best field personnel, an excellent reputation for service and performance, and the No. 1 or 2 market shares in most product lines.

Scale, scope and technology. Despite its massive size, we therefore believe SLB will demonstrate impressive margin expansion and operating leverage. SLB has invested ~$2.4bn in technology over the past three years, and while its strategy has been market share and old technology during this downcycle, this will likely shift to pricing and margin expansion via new technology introductions during the coming upcycle.

Robust oil-driven cycle lasting 6-7 years. We believe SLB is in the starting blocks to repeat its impressive performance of the 2002–2008 cycle (when top line climbed 3x). By 2015/16, we believe SLB should be able to grow from ~$35bn today to $100bn in revenue, translating in EPS CAGR of ~25%.

Attractive valuation: Barring a collapse in oil prices, we think SLB is on track to print $5/shr annualized EPS by the end of next year. At today’s $68/shr, the stock screens very attractively at 13x P/E for a company posting 60% earnings growth into 2011 and ~25% compound earnings growth for the following five years.

 

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