Deutsche Bank recently reiterated a buy rating on Schlumberger (SLB) with a price target of $95.00. With the company in a bearish trend, what does the analyst see? Simply put, Schlumberger has the best margins in the industry. It stated:
"The international margin gap vs. peers expanded and SLB now also boasts the highest North American (NA) margins as well, making it the through cycle margin leader."
They are expecting margins to continue to grow and pricing to get better as the industry cycles.
Efficiency in North America Key
Schlumberger's North American operations are not nearly as profitable as some overseas investments right now. Income for the quarter was down 12% and must deal with budget constraints and volatility in pricing. Many companies are backing off some of their drilling activity right now. Without the overseas operations, the company would not have performed as well as it did in the quarter. Equipment continues to pile up here because of the natural gas prices and the falling demand for pressure pump services. So what is a company to do facing this negative pressure in North America? One cuts back on expansion and focuses on better resource utilization. This includes rig efficiency and drilling. In fact, a competitor, Baker Hughes (BHI), reported that it has increased its rig efficiency by around 15% this year.
It looks like deep Gulf drilling may be profitable for the company while fracking is hurting the bottom line presently. While the move into shale has benefited Schlumberger and competitors like Halliburton (HAL), it is the over supply of hydraulic fracturing capacity that has slowed its decline in U.S. fig counts. This is what led to a 2% drop in U.S. revenue while foreign revenue increased. So the delicate balance between an over abundance of hydrocarbons from the shale and deep water drilling in the gulf coming back to help Schlumberger will play an interesting role in the company's revenues in coming quarters.
Where is the stock headed from here?
Presently with oil and gas prices slumping I am observing the stock will continue in its present short term bearish pattern a bit longer. But the industry cycles and the company have an extremely good margin. I cannot say exactly when, but I believe we will see a bottoming of oil prices soon and as the Gulf drilling grows slowly it will benefit the company. I think the stock will be a good investment after I observe whether it dips to "62" or not. I like this level for a buy in.
Schlumberger tends to mirror the market as a whole and it does the same now. After peaking in mid September, it is now into its 7th week of a bearish trend. The gentle slope following the lower Bollinger Band is telling me that it is not done moving down either. If I look to the RSI indicator and the MACD, I will learn nothing new. Both indicators support the bearish move and show no signs that it is done. For this reason I would conclude that the stock will continue to move down for the near future. It has touched a very strong support area and a break through here could bring it down to the "62" level.
The Options Play
Its trading at 68.48.
- Buy the March 2013 put with a strike of '70.00' (priced at $5.65)
- Sell the March 2013 put with a strike of '67.50' (priced at $4.25)
- Net Debit to Start: $1.40
- Maximum Profit: $0.90
- Maximum Risk: net debit
- Maximum Length of play 4 months
Reasoning behind the trade
- Play the present trend.
- Short term numbers are not good enough to turn the stock around yet.
- Oil and gas still sinking lower.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.