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Thursday August 12, 2010
Schlumberger (SLB) 'Must-own' oil services stock
by Elliott Gue, editor The Energy Strategist  Schlumberger (SLB) is the biggest oil services company, hands down. As such, the firm’s operations extend into just about every imaginable oil or gas-producing region of the world. The company, in our view, is in the sweet spot of the oil-services cycle. Despite Schlumberger’s exposure to the Gulf, the hit to the company’s bottom line shouldn’t be too dramatic, nor will it affect long-term growth prospects. At this valuation the stock already prices in these headwinds. All told, Schlumberger expects international activity to increase gradually in the latter half of 2010 and into 2011, expanding the company’s margins. 
Management also suggested that this growth will more than make up for the impact of the moratorium over the next few quarters. Schlumberger appears to be approaching the sweet spot of the cycle; expanding margins and increasing activity tend to propel the stocks higher. The oil-services business is one of the most high-tech industries on the planet. Schlumberger has earned a deserved reputation for developing and commercializing some of the most-advanced technologies out there. Investors should also remember that Schlumberger is generally associated with exploration more than than development. In other words, Schlumberger’s largest competitive advantages tend to lie in service functions related to exploring for new oil and gas fields. That’s not to suggest that Schlumberger isn’t involved in development; rather, an uptick in exploration tends to provide more of an earnings boost. This operational bias means that Schlumberger’s sweet spot occurs slightly later in the cycle; as commodity prices rise, companies first develop existing fields more aggressively and then focus on exploration. Bottom line: I consider Schlumberger to be a must-own energy stock for the long-term, as it will benefit from the secular trends toward greater oilfield complexity. Learn more about this financial newsletter at Elliott Gue's The Energy Strategist. |
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