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Listen "9: Schlumberger (SLB) Dividend Paying Energy Stock Passive Income Investment Analysis"
Episode Synopsis
On today’s Passive Income Investment Idea Episode we are analyzing Schlumberger, ticker SLB. Schlumberger is a High Quality, Narrow Moat Company Selling at a Significant Discount to Fair Value.
Schlumberger is the world’s largest supplier of products and services to the oil and gas industry. The company operates its business via multiple groups: reservoir characterization, drilling, production, and Cameron. It is investing more than any other services firm to make its offerings more bundled, which it believes is likely to be one of the key industry trends during the next 10 years. Efforts on this front are most visible via the Schlumberger Production Management business, which now accounts for 10% of its revenue.
As of Nov. 11th, 2020, Schlumberger has an S&P Credit Rating of A with a 55% LT Debt/Capital. Morningstar rates Schlumberger as Narrow Moat (meaning it can fend off competition for at least the next 10 years) with a Stable Moat Trend, Exemplary Stewardship, and High Fair Value Uncertainty currently trading Significantly Undervalued at a 62% Discount to Fair Value and 5 Star Rating.
Analysis of the historical trends using FastGraphs shows that Operating Cash Flow has correlated strongly with stock price over time. The historical Price to Operating Cash Flow Multiple Range has been Wide, ranging from 15-10. Over the past 10 years, the multiple has been approximate 13.5x. Currently the Blended P/OCF is 8.41, an approximate 38% discount to the 10YR historical range. This translates to a 11.89% Blended Operating Cash Flow Yield. The consensus of 3 Analysts expect Schlumberger to grow Operating Cash Flow an average of 9.72% per year between today and the end of 2022. The trailing 10 YR Operating Cash Flow Growth has averaged -4.54% per year and traded at an average P/OCF ratio of 12.22. Therefore, the company is projected to grow Operating Cash Flow Faster than in the past. As such, we can easily justify using the low end of the historical multiple’s range for valuing the company today. Assuming Schlumberger grows Operating Cash Flow at a rate of 9.72% annually and reverts to a valuation of just 10 times Operating Cash Flow, an investment today would return over 28% Annualized. The current price is $18.31 and our Target Sell Price based on Projected Operating Cash Flow is $40.
In Summarizing their thesis, of which we agree, Morningstar states that “Schlumberger remains our top oilfield-services pick. Thanks to its strong balance sheet and focus on less-volatile international markets, we expect it to weather the storm facing oil markets over the next two years. Investors shouldn’t be discouraged by the temporary dividend cut, which is a wise precautionary move given the severe nearterm industry environment. In the long run, we think Schlumberger will benefit from secular growth in international capital expenditures. Also, we think the company is poised to gain market share and improve margins via its efficiency-boosting integrated and performance-linked project initiatives.”
For an even better option, we are Selling Cash-Covered Puts to generate either guaranteed returns over 30% annualized or an even better entry position into Schlumberger at a lower price. To learn more, be sure to take our Online Course about Selling Cash-Covered Puts.
P.S.
***** If you’d like to get access to all of our Investment Analysis Reports along with all of our Online Courses on Investing for Passive Income and Total Return to Reach Financial Independence as well as our Monthly Portfolio Updates then simply go to BusinessAndInvestingSherpa.com and sign up for a PRO Membership. *****
Schlumberger is the world’s largest supplier of products and services to the oil and gas industry. The company operates its business via multiple groups: reservoir characterization, drilling, production, and Cameron. It is investing more than any other services firm to make its offerings more bundled, which it believes is likely to be one of the key industry trends during the next 10 years. Efforts on this front are most visible via the Schlumberger Production Management business, which now accounts for 10% of its revenue.
As of Nov. 11th, 2020, Schlumberger has an S&P Credit Rating of A with a 55% LT Debt/Capital. Morningstar rates Schlumberger as Narrow Moat (meaning it can fend off competition for at least the next 10 years) with a Stable Moat Trend, Exemplary Stewardship, and High Fair Value Uncertainty currently trading Significantly Undervalued at a 62% Discount to Fair Value and 5 Star Rating.
Analysis of the historical trends using FastGraphs shows that Operating Cash Flow has correlated strongly with stock price over time. The historical Price to Operating Cash Flow Multiple Range has been Wide, ranging from 15-10. Over the past 10 years, the multiple has been approximate 13.5x. Currently the Blended P/OCF is 8.41, an approximate 38% discount to the 10YR historical range. This translates to a 11.89% Blended Operating Cash Flow Yield. The consensus of 3 Analysts expect Schlumberger to grow Operating Cash Flow an average of 9.72% per year between today and the end of 2022. The trailing 10 YR Operating Cash Flow Growth has averaged -4.54% per year and traded at an average P/OCF ratio of 12.22. Therefore, the company is projected to grow Operating Cash Flow Faster than in the past. As such, we can easily justify using the low end of the historical multiple’s range for valuing the company today. Assuming Schlumberger grows Operating Cash Flow at a rate of 9.72% annually and reverts to a valuation of just 10 times Operating Cash Flow, an investment today would return over 28% Annualized. The current price is $18.31 and our Target Sell Price based on Projected Operating Cash Flow is $40.
In Summarizing their thesis, of which we agree, Morningstar states that “Schlumberger remains our top oilfield-services pick. Thanks to its strong balance sheet and focus on less-volatile international markets, we expect it to weather the storm facing oil markets over the next two years. Investors shouldn’t be discouraged by the temporary dividend cut, which is a wise precautionary move given the severe nearterm industry environment. In the long run, we think Schlumberger will benefit from secular growth in international capital expenditures. Also, we think the company is poised to gain market share and improve margins via its efficiency-boosting integrated and performance-linked project initiatives.”
For an even better option, we are Selling Cash-Covered Puts to generate either guaranteed returns over 30% annualized or an even better entry position into Schlumberger at a lower price. To learn more, be sure to take our Online Course about Selling Cash-Covered Puts.
P.S.
***** If you’d like to get access to all of our Investment Analysis Reports along with all of our Online Courses on Investing for Passive Income and Total Return to Reach Financial Independence as well as our Monthly Portfolio Updates then simply go to BusinessAndInvestingSherpa.com and sign up for a PRO Membership. *****
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