(By Mani) Over the past 20 plus years, the diversified oil service companies generated limited consistent free cash flow and typically spent all of their free cash on Capex and acquisitions. However, 2013 will be the first year that some of the oil service companies will begin to generate healthy free cash flow levels and return them to shareholders, particularly Schlumberger Ltd. (NYSE: SLB) and Halliburton Co. (NYSE: HAL).
Houston, Texas-based Schlumberger is one of the world's leading oilfield services company supplying technology, information solutions and integrated project management that optimize reservoir performance for customers in the oil and gas industry. It employs more than 115,000 people representing over 140 nationalities and working in approximately 85 countries.
Based in Houston, Texas, Halliburton is one of the world's largest providers of products and services to the energy industry. With more than 70,000 employees in approximately 80 countries, the company serves the upstream oil and gas industry throughout the life cycle of the reservoir – from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.
Both Schlumberger and Halliburton are considering methods to return excess cash flow to shareholders despite expectations that capex will remain near record levels in 2013, and free cash flow will become increasingly significant.
Given the sustained levels of free cash flow generation, both Schlumberger and Halliburton are likely to raise their dividends in 2013.
"We believe Schlumberger could lean towards a dividend increase, with consistent increases in its dividend over time. Halliburton we believe could consider both a dividend increase and a share buyback," UBS analyst Angie Sedita said in a note to clients.
Schlumberger is expected to generate almost $5 billion in free cash flow in 2013 after maintenance and growth capex of about $4 billion. As of Sept.30, the company had about $4.76 billion in cash and short-term investments. Schlumberger, which ended 2011 with cash of $1.7 billion, is expected to end 2012 with a cash balance of $2.44 billion.
"We expect a total cash build in 2013 of over $3 billion and well over $4 billion in 2014," Sedita noted.
The company could begin to raise its dividend on a consistent basis in coming years given sustained levels of free cash flow. It currently pays a quarterly dividend of 28 cents for a 1.54 percent dividend yield.
"We believe Schlumberger could raise its dividend to around a market yield of 2.2%-2.5% from 1.5% today. This would result in an additional cash outlay of only $625 mil," Sedita said.
On the other hand, Halliburton is estimated to generate almost $1 billion in free cash flow in 2013 and almost $2 billion in 2014. Total cash will build by almost $700 million in 2013 and by about $1.5 billion in 2014. The company ended 2011 with cash $2.7 billion, and is projected to end 2012 with cash of about $2.21 billion. As of Sept.30, it had cash and cash equivalents of $2.03 billion.
Investors would be skeptical if there would be enough cash for shareholder returns as the Macondo settlement is looming. Halliburton would pursue a return of cash to shareholders regardless of a Macondo settlement.