Now that Halliburton is buyingBaker Hughes in order to make a run at Schlumberger , many investors are probably wondering which one of these two oil-field services companies is the better buy today. So we asked two of our energy contributors to lay out why one should be higher on your buy list than the other. Here's what they had to say.
Matt DiLallo: The case for HalliburtonThere is a clear and compelling case to be made that Halliburton is a better stock to buy now, and that it is the better company to own for the long term.I'll start with value. As the following chart shows, Schlumberger has historically traded at a premium valuation over Halliburton:
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Because of Schlumberger'slarger size and scale, investors have traditionally paid a premium to own its stock. This irks Halliburton's senior management because their company's operational returns have been better than its larger peer, particularly over the past few years, as we see in this next slide.
Halliburton, thus, believes it deserves the premium valuation from investors. But it realizes that won't happen until it can rival Schlumberger in size. This is aprimary driverbehind the company's desire to merge with Baker Hughes: It feels the combination will provide it with synergies and new opportunities, as well as the scale it needs to demand a higher valuation multiple.
It's my belief that once the deal closes Halliburton will indeed begin to close itsvaluation gap with Schlumberger. Which is why I think its stock has the potential to outperform Schlumberger over the long term -- investors are not only getting a better value now, but also a company that should enjoy a much higher valuation in the future once the energy market settles down a bit. So if I had to choose between the two, I believe Halliburton is unquestionably the better buy now.
Tyler Crowe: The case for Schlumberger
I'm not afraid to admit that Halliburton's stock might perform a little better than Schlumberger'sover the next year or so. Over that sort of time period, though, it's too much of a crap shoot to pick a clear winner.If looking to buy one of these companies and hold on to it for a long time, on the other hand, the following chart makes it hardto argue Halliburton is a better investment than Schlumberger.
It isn't sheer coincidence that Schlumberger's stock has outperformed Halliburton's by close to four times over this decades-long time horizon. It comes down to a few key things.
- Schlumberger runs a leaner operation.I'm going to act like a sports journalist and accuse Halliburton of juicing -- on debt, that is. Those higher return numbers from Halliburton (as seen in Matt's chart above)are in part because it has been running a higher debt leverage ratio, and it takes a higher level of working capital than Schlumbergerfor the company to generateearnings. This can help a company look better in the good times like these past few years, but it can also sink a company when the market goes south.
- Schlumberger's revenue is tied to longer-term, higher-margin projects, such asdeepwater operations and international business, while Halliburton is much stronger in North America and in onshore shale drilling. While both of these sources of oil and gas are high cost and will likely decline, it takes far more time to wind downa deepwater project than to closea shale well, meaning the impacts of the production decline will be felt faster by Halliburton. Throw in Schlumberger's more technology-driven, less-commoditized services, and you get EBITDA margins 5 percentage points higher.
It's far too brazen to say Schlumberger's stockwill continue to crush Halliburton's as it has over the past several decades, but that 2.4% dividend yield (compared to Halliburton's 1.8% and Baker Hughes' 1.2%) certainly has helped. Bottom line, Schlumberger has had a higher valuation for a reason: it's just the better company.
The article Better Buy Now: Schlumberger vs. Halliburton originally appeared on Fool.com.
Matt DiLallo has no position in any stocks mentioned. Tyler Crowe has no position in any stocks mentioned. The Motley Fool recommends Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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