Free Financial Analysis: Schlumberger V/S Baker Hughes Essay Sample
About the company:
Founded in the year 1926, Schlumberger is the world’s largest oil-field service company. Headquartered in Texas, United States, the company has its principal offices in other areas such as Paris, London and Hague with a total workforce of 120000 employees. The company operates through three business through business segments, Reservoir Characterization Group, Drilling Group, and Production Group.
Schlumeberger is represented by its board of directors headed by Chairman, Mr. Paal Kibsgard and CEO, Mr. Simon Ayat.
About the industry: Oil and Gas equipment services
Schlumberger operates in Oil and Gas field services industry which is also known as the ‘’Unsung masters of the oil industry’’. The companies in this industry support field operations of oil companies on contractual basis. Some of the major companies in this industry apart from Schlumberger are Baker Hughes, China Oilfield Services, Halliburton, Nabors Industries, National Oilwell Varco, Saipem, Transocean, and Weatherford International. Each company offers differentiated services which majorly includes, drilling, well surveying and cementing, cleaning out, et cetera.
Financial Performance over three years
On comparing the crucial financial items of the company against its competitor, Baker Hughes, we have been able to summarize the following information:
As we can witness from the table above, Schlumberger has a significantly higher amount of revenue figures in comparison to the competing company, Baker Hughes Inc. Comparing the 3 year revenue trend, both the companies have recorded growth in revenue figures, but Schlumberger scores high with 17.50% growth in the revenue figures since 2011 while Baker Hughes recorded 12.77% growth during the same period.
A graph has also been attached to compare the revenue figures for both the companies:
The dominance of Schlumberger in the oil field service industry is well spoken by its profit numbers. Over the period of our analysis, the net income figures of the company has rose consistently from $4997 million in 2011 to $6732 million in 2013. On the other hand, the results are not encouraging for Baker Hughes as the entity is witnessing consistent back-drive in its profit figures that has went down from $1739 Million in 2011 to $1096 million in 2013.
A graph has also been attached to compare the revenue figures for both the companies:
Asset base have a great importance for a company operating in oil field service industry. As for Schlumberger, the asset base of the company is on surge and has reached $67100 till 2013. On the other hand, Baker Hughes has recorded very marginal growth in the asset base which are recorded at $27934 million till 2013, even less than 50% of the asset base of Schlumberger.
A graph has also been attached to compare the asset base of both the companies:
Net Working Capital Position
Comparing the net working capital position(current assets-current liabilities) of both the companies, we can witness that Schlumberger is at a better standing and is in a good position than Baker Hughes to pay off its short-term obligations.
A graph has also been attached to compare the net working capital position of both the companies:
This section is the most crucial section of this report where using the tool of ratio analysis, we will compare the ongoing financial trend of the company while the results will also be compared with the rival company, Baker Hughes. In order to arrive at a convincing conclusion, we will be discussing multiple ratio sections, namely, liquidity ratios, profitability ratios, solvency ratios and market ratios.
These ratios helped us in accessing the ability of the company to honor its current obligations as and when they become due and how the same have changed over the three year period:
Formula: Current Assets/ Current Liabilities
Formula: (Cash + Inventory)/ Current liabilities
Referring to the above tables, we witnessed that the current ratio of Schlumberger has been constant throughout the 3 year period at 1.95. On the other side, Baker Hughes which till now indicated relatively inferior standing in comparison to Schlumberger recorded higher current ratio multiples, although in declining trend.
Thus, in order to access the real liquidity scenario of both the companies, we calculated the stringent measure of acid ratio and found that while the multiple of Baker Hughes was declining consistently, Schlumberger indicated better liquidity position with consistent rise in the acid ratio multiple.
In the nutshell, Schlumberger have a healthy liquidity position and will not have any difficulty in paying off the current obligations.
These ratio set indicates the profitability margins being earned by the company from its business activities. All the stakeholder along with the market analysts keep a close watch on the profit announcements of the company as the same influences their interest in the company. Below discussed is the trend in the profitability ratios of the company for the three year period:
-Net profit margin
Formula: Net Income/ Revenue
-Return on Equity
Formula: Net Income/ Total Equity
Referring to the above table, we can assume that we are reaching at a preliminary conclusion relating to strong financial health of Schlumberger. Beginning with the net income margin, the company registered consistent surge in the multiple that went up from 12.64% in 2011 to 14.49% in 2013. On the other hand, Baker Hughes seem to be struggling as just like its other financial multiples, even the trend in the net margins was depressing as the same declined from 8.77% in 2011 to 4.90% in 2013.
Apart from maintaining strong net margins, Schlumberger has also taken a due care of its shareholders and they(shareholders) must be ecstatic to witness the upward trend in the ROE multiple over the period of three years.
These ratios assist in unearthing the capital structure of the company as what percentage of the same is constituted by debt and other by equity. In addition, some of the solvency ratios also indicate the interest paying capacity of the company. Hence, overall, these ratios provide complete information over financial risk embedded in the company. Below discussed is the trend in the solvency ratios for the company for the three year period:
Formula: Debt/ Equity
-Interest Coverage Ratio: Operating Income/ Interest Expenses
Combining the results for both the solvency ratios where we witnessed that Schlumberger has a marginally higher debt-equity ratio than Baker Hughes, however, the former company justified its stance of higher debt position through its interest coverage ratio that was on the uptrend during 2013, indicating that although the company have enough capacity to honor its interest obligation.
However, the outcome for Baker Hughes was rather disturbing where although the company has been maintain a constant debt-equity ratio but has not paid any interest since last three years. This is a clear indication that the company is pulling itself into financial risk and at times when net margins are declining and no interest payments are being made, there are high chances of bankruptcy declaration.
In the nutshell, Schlumberger has impressed us again with its solvency position and we have no doubts that the company will honor its long-term obligations without any hassle.
d) Efficiency Ratios
This is the last set of ratios that we will analyze for this report. Also known as Asset Utilization ratios, these ratios indicate the level of management efficiency over the use of the asset base of the company. Below discussed is the three year trend in the efficiency ratios of the company:
Days of Inventory
Formula: (365* Inventory)/ Cost of Revenue
Referring to the table above, we can witnessed that it takes significantly lesser amount of time for Schlumberger to sell its inventory than its rival company, Baker Hughes. Thus, owing to this situation, capital is freed up quickly and improves cash conversion cycle of the company.
This is a traditional financial method to measure the financial performance of the company by decomposing the ROE multiple using the following formula:
ROE: Net profit margin* Asset Turnover* Financial Leverage
= (Net Income/ Revenue)*( Revenue/ Total Assets)* (Total Assets/ Total Equity)
2011: (4997/39540)*(39540/55201)* (55201/31263)
= .1263* 0.71* 1.76
2012: (5490/42321)* (42321/61547)* (61547/34751)
= .1298* 0.68* 1.77
2013: (6732/46459)* (46459/67100)* (67100/39469)
= .1449* 0.69* 1.70
2011: (1739/19831)* (19831/24847)* (24847/15746)
= 0.08* 0.79* 1.57
2012: (1311/21361)* (21361/26689)* (26689/17069)
= 0.06* 0.80* 1.56
2013: (1096/22364)* (22364/22934)*(22934/17713)
= 0.05* 0.97* 1.29
Analysis and Recommendation
On a generalized trend, ROE for Schlumberger seems impressive, however, the real situation is revealed by the Dupont Identity which indicated that ROE of the company is majorly driven by the financial leverage and not by net margins or asset turnover. However, over the three year period, the company has been reducing its financial leverage and it is the increased profit margins and asset turnover that lead to surge in the ROE multiple from 15.62% in 2012 to 16.99% in 2013.
On the other hand, Baker Hughes impressed us with its high asset turnover and reduced financial leverage over the three year period, however, the inability of the company to ensure surge in the net margins lead to fall in the ROE multiple.
Overall, Schlumberger has better financial metric contributing to its ROE multiple. However, the management still needs to re-consider its leverage position and should try to bring it down as ROE sourced from high net margins and asset turnover is more sustainable.
Capital Spending, Credit Ratings and Beta Value
Continuing with the objective of providing a comprehensive recommendation to our clients over the financial standing of the company, we extended our financial analysis to other financial aspects such as capital spending, credit rating and current beta value of the company. The results are also compared with the competitor company, Baker Hughes:
Comparing the capital expenditure of the company with its competitor, we found that Schlumberger has always been spending higher amount on its capital projects. During 2013, the company spent $3943 million on capital expenditure while Baker Hughes spent $2085 million.
-Schlumberger: The company received its latest rating upgrade on 23rd June, 2014 as rating agency Moody upgrade Schlumberger to Aa3.
-Bake Hughes: The company received its latest rating upgrade on 18th November, 2014 as rating agency Moody upgraded Baker Hughes to A2.
-Baker Hughes: 0.73
Referring to the beta of both the companies, Schlumberger indicates higher volatility to the changes in the market returns with beta multiple higher to Baker Hughes.
Stock Growth over 5 years:
Before heading towards analyzing the stock performance of the company during the year, we analyzed the growth in the stock price of the company over the period of 5 year and found the following result:
Referring to the graph above, we can witness that the stock has grown steadily over the period of 5 years and has always been higher to its competitor.
In this section, we analyzed the trend in the stock price of the company for past one year while the prices were also compared with that of its competitor company, Baker Hughes:
Referring to the graph above, we can witness that the stock price of Schlumberger has always been higher than Baker Hughes. However, after witnessing the small upside run in the beginning months of 2014, the stock price of the company has been declining consistently which can be correlated to the growing concerns in the oil industry because of falling prices of crude oil and increasing supply around the globe. The similar trend was witnessed in the stock price of Baker Hughes. Below are the detailed stock prices for both the companies during a year:
Referring to the table above, we can see that the stock price of Schlumberger touched the 52 week high(monthly prices) of $106.87 in July, 2014. However, post that period, the stock price has been declining consistently as the fall in crude oil prices began and it was only during the latest month when the crude price touched $60/barrel again after declining to as low as $48/barrel in January, 2015. These trends indicate the high dependence of oil field service industry on the demand and supply pattern of oil globally.
At the conclusion of this report, where we analyzed the financial performance of the leading oil field service company, Schlumberger using ratio analysis, Dupont Identity, Stock Price analysis and some other financial aspects, we can assert that the company is indeed having a strong financial standing. As we witnessed in the ratio analysis section, the company has been able to consistently improve its revenue figures, profit margins and at the same time have strong and sustainable liquidity and solvency roots.
However, what concerned us was the stock performance of the company and the existing position of the industry. During the past 6 months, the stock has lost 20.41% in value dipping from $106.87/ share in July, 2014 to the present value of $85.05/share. The poor stock run is not only confined to Schlumberger but to the whole oil industry amid the ongoing carnage in the crude oil prices. Moreover, even the industry forecasts are not in favor of the oil industry as none of the oil producing nation is ready to cut its supply and the unsold inventory is expected to reach new records.
Hence, with a company like Schlumberger which earns money from contracts received from oil companies like Exxon Mobil and Chevron, a poor run in the industry is most likely to pull the prices further down and the effect is visible now as the company recently declared to cut down 9000 jobs from its existing workforce.
Thus, despite the company registered good financial standing in the past years, we will not recommend the company for a long-term commitment as we expect the revenues and profits to come down from here until the whole oil industry attains stability.
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