Schlumberger vs. Baker Hughes: Which Oil & Gas Stock is a Better Buy?

Schlumberger Limited (SLB), which is headquartered in Paris, France, provides technology for the energy industry worldwide. The company operates through four divisions: Digital & Integration, Reservoir Performance, Well Construction, and Production Systems. In comparison, Baker Hughes Company (BKR) in Houston, Tex., provides a portfolio of technologies and services worldwide. The company operates through four segments: Oilfield Services; Oilfield Equipment; Turbo Machinery & Process Solutions; and Digital Solutions.

Oil prices rose on Monday to end January with their biggest monthly gain in a year due to a steady demand recovery as fears around the impact of the COVID-19 omicron variant faded and an increasingly tight supply market because OPEC+ failed to meet its production targets. Rising geopolitical tension between the U.S. and Russia over Ukraine is also contributing to the increase in natural gas prices. Because the world is still largely dependent on plentiful oil and gas supplies, even as climate control and clean energy become imperative, both SLB and BKR should benefit.

SLB has gained 30.5% in price over the past month, while BKR has returned 14.1%. Also, SLB’s 21.1% gains over the past three months are significantly higher than BKR’s 9.4% returns. Furthermore, SLB is the clear winner with 75.9% gains versus BKR’s 36.6% returns in terms of the past year's performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On Jan. 21, 2022, SLB’s CEO Olivier Le Peuch said, “The combination of our performance and returns-focused strategy is resulting in enduring customer success and higher earnings. As such, we have increased confidence in reaching our mid cycle adjusted EBITDA margin ambition earlier than anticipated and sustaining our financial outperformance.”

On Jan. 20, 2022, Lorenzo Simonelli, BKR’s Chairman and CEO said, "We are very excited with the strategic direction of Baker Hughes and believe the company is well-positioned to capitalize on near-term cyclical recovery and for long-term change in the energy and industrial markets. We look forward to another year of supporting our customers, continuing to advance our strategy, and delivering for shareholders in 2022."

Recent Financial Results

SLB’s revenues increased 13% year-over-year to $6.23 billion for its fiscal fourth quarter, ended Dec. 31, 2021. The company’s adjusted EBITDA grew 24% year-over-year to $1.38 billion, while its net income came in at $601 million representing a 61% year-over-year increase. Also, its EPS was $0.42, up 56% year-over-year.

For its fiscal fourth quarter, ended Dec. 31, 2021, BKR’s revenues were $5.52 billion, flat year-over-year. The company’s adjusted EBITDA grew 10% year-over-year to $844 million, while its adjusted net income came in at $224 million, compared to a $50 million loss in the prior-year quarter. Also, its adjusted EPS was $0.25 compared to a $0.07 loss per share in the year-ago period.

Expected Financial Performance

Analysts expect SLB’s revenue to increase 15.3% in the current year and 12% next year. The company’s EPS is expected to grow 52.2% in the current year and 31.4% next year. Furthermore, its EPS is expected to grow at 36.4% rate per annum over the next five years.

In comparison, BKR’s revenue is expected to increase 8.2% in the current year and 9.6% next year. Its EPS is expected to grow 101.6% in the current year and 35.4% next year. Also, the company’s EPS is expected to grow at a 50.9% rate per annum over the next five years.

Profitability

SLB’s trailing-12-month revenue is 1.12 times BKR’s. SLB is also more profitable, with EBITDA and levered FCF margins of 12.06% and 9.15%, respectively, compared to BKR’s 13.07% and 4.72%.

Furthermore, SLB’s 4.12% and 5.70% respective ROA and ROTC are higher than BKR’s 2.69% and 3.94%.

Valuation

In terms of forward non-GAAP P/E, BKR is currently trading at 21.10x, which is higher than SLB’s 19.96x. However, SLB’s 0.57x forward non-GAAP PEG ratio is higher than BKR’s 0.36x.

POWR Ratings

SLB has an overall B rating, which equates to a Buy in our proprietary POWR Rating system. In contrast, BKR has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

SLB has a grade of B for Quality. This is justified given SLB's 12.06% trailing-12-month EBIT margin, which is 42.8% higher than the 8.45% industry average. In comparison, BKR has a Quality grade of C, which is in sync with its 7.69% trailing-12-month EBIT margin, which is 9% lower than the 8.45% industry average.

Of 41 stocks in the Energy - Services industry, SLB is ranked #7. However, BKR is ranked #30 out of 78 stocks in the Energy - Oil & Gas industry.

Beyond what I have stated above, we have also rated the stocks for Growth, Sentiment, Stability, Value, and Momentum. Click here to view all the SLB ratings. Also, get all the BKR ratings here.

The Winner

Oil and gas prices are expected to remain high with the ongoing reopening of the economy because OPEC+ refuses to increase oil supply significantly, and tension between NATO and Russia escalates. So, both SLB and BKR are expected to gain. However, we think it is better to bet on SLB now because of its higher profit margin.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Energy - Services industry here. Also, click here to access all the top-rated stocks in the Energy - Oil & Gas industry.

SLB shares were trading at $39.60 per share on Tuesday afternoon, up $0.53 (+1.36%). Year-to-date, SLB has gained 32.22%, versus a -5.22% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

More...