Schlumberger's Call Had It All

 | Jul 22, 2013 | 2:18 PM EDT
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What makes for a perfect quarter? What has to be said in a conference call to lift a stock into the winner's circle of biggest percentage gains? Look no further than last Friday's Schlumberger (SLB) conference call, the one that spurred the stock to go from $78 to $82, because that call had it all.

First, we heard some magic words that we don't normally hear from more than a handful companies, and even then, we are skeptical: a five year plan. That's right, a roadmap for "strong projected cash flow" that goes out five years. Given the bountiful nature of the company's cash, management was able to lay out a progressive dividend plan as well as a gigantic, $10 billion repurchase program that, if anything, is liable to be increased as time goes on.

Second, the company experienced double-digit year-over-year revenue growth and margin expansion in almost every business line. Over and over again, we have heard about companies producing terrific margins, and that's been the backbone of the advance. However, very few industrial companies have given us margin expansion and revenue growth.

Third, much of the expansion came from deployment of new, proprietary technology. At a time when the actual technology stocks seem to be producing unexciting, undifferentiated desk tops, laptops, cellphones and even tablets, Schlumberger is breaking out from its competitors with technology that allows their clients to get more oil out of the ground for less money.

Fourth, the company is opening up new markets that are lucrative but had hitherto been the subject of political risk that overwhelmed opportunity. The business Schlumberger gained in Iraq and Venezuela (yes, pariah Venezuela), was truly outstanding. Management knows what we worry about, and they made it clear that the Venezuela payments are coming through nicely.

Fifth, the clients are flush and a new spending cycle has just begun. For five years now, the oil companies, both the national and the private ones, have been waiting for a sign that the price of oil will remain elevated. They now believe that we are in a new era of high prices and that is triggering new programs from old clients, including Mexico and traditional producers in the Middle East, as well as aggressive drilling in North America. Capital expenditure programs are increasing worldwide. Sub-Saharan Africa, Russia, the Middle East, particularly Saudi Arabia and Iraq, as well as China and Australia are the main growth markets.

Sixth, revenue per rig is expanding. In previous years, we have seen more rollouts of drilling programs but they have often required services to be given away and unattractive margins. That's not the case with the current drilling programs the company is involved with. This is, and I quote, "Obviously helping profitability." Included in this mix? Turndowns of business that is less profitable than Schlumberger would like -- something that can be done because the rest of the business is so strong.

These factors combined to get the attention of buyers in a most congested time for reports. Remember, there is massive competition right now for the eyeballs of analysts and portfolio managers. They are all looking for the same thing and it's exactly what Schlumberger is giving them: a combination of growth, both on the top and bottom lines, as well as fantastic visibility. And that's how a quarter can boost a $100 billion company 4 points in a day when so many companies reported and there's so little time to be able to differentiate them.

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