Should Investors Buy These Big Buybacks?

Along with announcing earnings, both Halliburton and Schlumberger announced multi-billion-dollar stock buybacks. With so much money on the line, investors have to ask if this is the right move for these two oil-field service giants. Are these stocks cheap enough to warrant the buybacks or should these companies consider other options for those funds?

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Before considering what else these companies could or should be doing with all that money, it's a good idea to take a look at what's already been decided. Taking a look at Schlumberger, the company just finished up its previous $8 billion buyback program which was approved in April 2008. This past quarter, the company spent $500 million and was able to snap up 6.8 million shares at an average price of $73.07, basically to complete the authorization. With shares trading about $10 more at the time of this writing, it would appear that the company got a pretty good deal.

However, looking ahead, the company's board has approved a new $10 billion buyback program. It expects to complete this by June 2018. For perspective, the company's market cap is just over $110 billion, so the authorization would equate to about 9% of its currently outstanding shares. Yet with shares trading at 18 times earnings, the stock isn't exactly a screaming bargain.

Halliburton also largely exhausted its previous stock buyback plan after spending a billion dollars to repurchase 23 million shares in the second quarter. The company reloaded its plan so that it now has another $5 billion to repurchase its stock. That would allow the company to buy back about 12% of its outstanding shares. However, like Schlumberger, its stock isn't exactly cheap at more than 21 times earnings.

As long as both companies are opportunistic in the buybacks, then shareholders will do well in the long term. However, buybacks might not be the best option here. In reading through earnings reports and conference call transcripts over the past year, two trends have been very clear in the oil-field service and equipment sector. The North American market is very challenged, while growth is being supplied internationally. One of the big issues in the North American market is competition. This is why I think it would make more sense for these companies to use their cash to reduce the competition by acquiring it.

For example, in warning that its quarter would be rough, Nabors Industries said that it saw weakness in the North American pressure-pumping business while noting that intense competition was really crimping its results. This caused the company to miss earnings estimates by 23% this past quarter. Similarly, Baker Hughes reported that while its pressure-pumping business was improving, it's not driving the company's business because of competition. On the other hand, oil-field services are booming internationally as well as in the deepwater of the Gulf of Mexico where Baker Hughes, in particular, saw record performance.

It would seem as though there is just too much capacity and competition onshore in North America for oil-field service providers to make the returns you'd expect in light of the fact that oil production in the U.S. is booming. That's why industry consolidation would appear to be a much better way for these companies to spend the money being earmarked for buybacks. It would only strengthen the lead these two have over the rest of the competition.

Intense competition is one reason why these companies might not be the best way to play the energy sector. Instead, a stock that you might want to consider is one that The Motley Fool's analysts have uncovered, which is an under-the-radar company that's dominating its industry. This company is a leading provider of equipment and components used in drilling and production operations, and poised to profit in a big way. To get the name and detailed analysis of this company that will prosper for years to come, check out the special free report: "The Only Energy Stock You'll Ever Need". Don't miss out on this limited-time offer and your opportunity to discover this under-the-radar company before the market does. Click here to access your report -- it's totally free.

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Fool contributor Matt DiLallo 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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