Schlumberger Leads The Way, Like It Usually Does

There are lively debates to be had about whether it's better to own the leaders or laggards as a sector bottoms, the idea being that the laggards have more to gain when conditions improve. Schlumberger (NYSE:SLB) is definitely no laggard, as the company once again delivered a set of results that confirms its leadership in multiple sectors and geographies in the energy services space. With Schlumberger doing well in North America, well-positioned in offshore/deepwater with its OneSubsea venture with Cameron (NYSE:CAM), and only beginning to take advantage of what China may have to offer, Schlumberger continues to look like a worthwhile idea in the energy space.

Second Quarter Results Come In Ahead
Unlike Baker Hughes (NYSE:BHI), where investors were frustrated in their expectations for a beat-and-raise quarter, Schlumberger delivered the goods with another strong, relatively well-balanced performance compared to expectations.

SEE: Baker Hughes Still Playing Third Fiddle

Revenue rose 7% from last year and 5% from the first quarter, as solid growth in international (up 10%/6%) offset more sluggish performance in North America (flat and up 2%). While Latin America continues to be a mediocre market (not helped by a slowdown in Mexico ahead of new contract awards), Russia, Africa, and the Mideast continue to offer growth opportunities for Schlumberger. It's also worth noting that Schlumberger did pretty well by revenue type – reservoir characterization revenue rose almost 9%/8%, while drilling was up 7%/4% and production was up 5%/4%.

Unlike Baker Hughes, which missed significantly on margins, Schlumberger came through strong after adjusting for the close of the OneSubsea JV. Overall operating income rose 9%/13%, with operating margin above 20% and better on both annual and sequential comparisons. North America was mixed (down 5%/up 6%), while international profits were up both annually and sequentially across the geographies.

North America Should Get Better, But How Much Better?
There are widespread hopes that things have gotten about as bad as they will get in North America in terms of drilling activity. To that end, pricing does seem to be improving across the board and activity may be picking up. Still, I think there are reasons to be careful in assuming a quick return to prosperity for the sector. E&P companies have come under a lot of pressure from investors to be more careful with their capital spending and balance sheets, and that could lead to a slower/flatter recovery trajectory. Even so, Schulmberger's strength in areas like reservoir characterization and exposure to oil should keep it in a good position relative to others like Baker Hughes and Halliburton (NYSE:HAL).

SEE: Analyzing Operating Margins

Multiple Ways To Grow
If North America recovers, Schlumberger will be there to take advantage of it. But it's not just a better North American market that could send Schlumberger higher – the company is also well-positioned to benefit from growth overseas and in offshore/deepwater activity.

The OneSubsea venture with Cameron gives the company an excellent technology/product partner, and the one-two combination of excellent equipment and Schlumberger's service capabilities ought to make it a formidable rival to companies like FMC (NYSE:FTI), General Electric (NYSE:GE), and so on. It's also worth mentioning that the company's JV with Anton Oilfield (Nasdaq:ATONY) in China should be a boost for the company's efforts to benefit from an upcoming boom in unconventional oil and gas exploration in China as company like CNOOC (NYSE:CEO) and PetroChina (NYSE:PTR) ramp up their efforts.

The Bottom Line
Schlumberger isn't the cheapest energy services stock today, and it seldom ever is. That's the price investors have to pay to invest with the leader in the sector. Giving Schlumberger an above-average 8.5x multiple to 2014 EBTIDA suggests a fair value of about $84 today, which doesn't suggest a major capital gains opportunity, but I wouldn't underestimate the possibility of those EBITDA estimates going higher. All told, Schlumberger may not be my first pick for the sector, but it's a quality name for investors who don't want to worry about execution issues or the difficult transition from being one of the lagging companies.

Dislcosure – As of this writing, the author owns shares of Cameron.