Schlumberger is the worlds largest integrated oil services provider with a focus on the use of technology to differentiate it’s products and services including drilling, exploration and production management. The company operates in
every oil market globally and invests more in Research and Development than all it’s peers combined.
INVESTMENT THESIS
Demand for Schlumberger services depends on operator capital expenditures (CapEx) which
determines the activity levels in the oil and gas industry such as the number of oil rigs in operation, the number of oil and gas wells being drilled, production volumes, and well completions. CapEx is largely dependant on commodity prices.
The basis for the Investment Thesis is founded on three pillars
1. Oil prices
In it’s 4Q2017 earnings report January 19, 2018 Schlumberger stated, ‘...after a full year of waiting, the oil market is now substantially rebalanced. This is also reflected in the oil market sentiment, but we currently are witnessing
a gradual shift from an oversupply discount towards the restoration of a market tightness premium with any geopolitical or operational disruption creating further upward movement in the oil price.’
2. CapEx increases
“... positive
oil market sentiments are also reflected in the E&P outlook, where the third-party surveys predict another 15% to 20% increase in North America investments in 2018 while the international market is poised for growth for the first time
in four years with a forecast of 5% increase in E&P spend... our international earnings power is four to five times higher than what we see in North America.”
3, Market share gains and margin expansion
Schlumberger is planning
to leverage it’s technological advantages and monetize assets to increase market share and participation in all aspects of it’s global business. The Company is targeting an incremental margin of 65% through 2019 by balancing pricing without
an increase in CapEx from 2016/2017 levels of $2B.
Investor returns
When a company has a share repurchase program, it acts to place a floor of buying support on stock price pullbacks, increases stock price by reducing the total
share count which increases earnings per share and most importantly it shows confidence in the business. Dividends provide a cash return of profit to investors as a fixed return on the investment.
During 2017, Schlumberger returned
$3.7B to shareholders through the repurchase of 13.2 million shares at an average price of $73.11. 1.6 million shares were purchased in the 4th quarter at a price of $64.82 which reflects the floor of buying support during the December
stock price pullback. The current dividend is $2/share for a yield of 3%.
Tax reform
SLB expects it’s effective tax rate (ETR) to remain at approximately 20% through 2019. The tax reform acts to offset increases which were
previously expected.
Weakness/threats
Q1 2018 is expected to be a ‘transitory’ quarter where additional charges will be incurred followed by revenue acceleration in Q2 and Q3. Q1 has seasonal decline in revenue. SLB services
command a premium, as activity increases, operators may choose lower cost providers as risk mitigation to investment. SLB operates in a number of unstable regions, assets may be subject to government seizure or payment issues which recently
occurred in Venezuela.
A drop in the price of oil is the most significant threat. SLB share price will begin to trade in a closer correlation with oil so it’s important to understand the current interrelationship between oil speculation,
supply and dollar valuation. The following video provides a good overall synopsis of the current environment. Take note of the current speculation and hedge numbers, the current ‘fibonacchi’ technical sell zone for oil begins at at $67.
<
iframe src="https://player.cnbc.com/p/gZWlPC/cnbc_global?playertype=synd&byGuid=3000688125&size=530_298" width="530" height="298" type="application/x-shockwave-flash" allowFullScreen="true" bgcolor="#131313"></iframe><p><a
href="https://www.cnbc.com/video/2018/01/23/cramers-charts-show-oil-prices-could-soon-peak.html?__source=cnbcembedplayer">Cramer: With speculators the most bullish in history, charts show oil prices could soon peak</a> from <a
href="//www.cnbc.com/?__source=cnbcembedplayer">CNBC</a>.</p>
The Chart
Since 2014, the stock has been in a downward price trend initially correlated with the price of oil. A divergence occurred as
oil prices steadily climbed, but SLB trended down and found a base in Nov/Dec 2017 at $62. This lagging recovery divergence set up a powerful breakout above previous resistance of $69 as ‘best in class’ stocks are often the first to recover.
This prior resistance now becomes new ‘technical support’ and reflects the downside risk.
MoneyFlow - is positive and does not reflect an overbought condition until an indication above 80.
MACD (red/black lines) - has had
positive momentum. Eventually the stock will find a new trading range. The first indication to watch for is the black line crossing under the red line. The trend remains the trend until it is no longer a trend, then a new trend develops.
Golden Cross - the blue line (50 day moving average) has crossed above the red line (200 day moving average) this is a very bullish indication that the long term downward trend has ended.
Relative strength - has been very high.
This can indicate an overbought condition, but not always. The stock has made a strong move after a long period of forming a bottom.
Risk/Reward
Downside risk is strongly defined by the ‘technical support’ level at $69. Long
term upside reward extends all the way to analyst targets of $97 depending on continued momentum. Short term reward will be established when a new trading channel is established.
What does that mean at moneywiseHQ
We’ve
been waiting three years for the signal of the reversal in oil. While oil prices have slowly been rising, SLB just confirmed how and why the trend will continue, making the time right for a low risk entry into the sector.
Schlumberger
is a ‘best in class’ oil services provider and technological leader which has the ability and resources to execute it’s plan of market share gains, capitalize on domestic and international opportunities with the tailwinds of increasing
CapEx by operators, trending market tightness and tax reform.
Analyst estimates target $97 reflecting approximately 30% reward and technical downside risk to $69 . Pullbacks within the technical support area of $70 can be considered
low risk buying opportunities. Current prices in the $74-$78 range reflect the price SLB was prepared to pay for its own shares through buybacks in 2017.
It’s important to understand the risk associated with speculation/hedging
in the short term. As the stock price continues to rise, it’s important to protect gains. As a longer term investment, the stock can be given a little more of a loose trailing stop of around 5%. As a short term trade, ride the trend with
a tighter trailing stop and watch for the indicators to signal the start of the establishment of a channel trend.
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