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Shares of Schlumberger (SLB) fell some 5% in Friday's trading session. The supplier of the oil and gas industry issued a disappointing fourth quarter update, prompting a sell-off in the company's shares.

Fourth Quarter Update

Schlumberger issued a poor quarterly operational update on Friday which came as a surprise to investors. The company has seen weakness across the board. Activity in Europe and Africa experienced a continued delay in contractual agreements. Furthermore, the seasonal slowdown in activity levels was steeper than normal.

North American activity levels were weaker than expected as well, based on lower onshore activity in the US and Canada.

Consequently, Schlumberger estimates that earnings per share are expected to be impacted to the range of $0.05 and $0.07 per share.

Valuation

Schlumberger ended its third quarter with roughly $4.8 billion in cash and equivalents. The company operates with $11.2 billion in short and long term debt, for a net debt position of $6.4 billion.

For the first nine months of 2012, Schlumberger generated revenues of $31.0 billion. The company net earned $4.1 billion, or $3.08 per diluted share. At this rate, the company could report annual revenues of $42-$43 billion. The company could earn around $4.05-$4.25 per share, or around $5.5 billion.

Factoring in Friday's decline, the market values Schlumberger at roughly $91.5 billion. This values the firm at roughly 2.2 times annual revenues and 16-17 times annual earnings.

Currently, Schlumberger pays a quarterly dividend of $0.275 per share, for an annual dividend yield of 1.6%

Some Historical Perspective

Year to date, shares of Schlumberger traded roughly unchanged. Shares started the year around $68 in January and quickly rose to highs of $80 in February. Shares fell back to $60 in July on concerns of weaker economic growth which pushed down oil prices. Shares recovered, currently exchanging hands at $69 per share.

Shares in the company peaked a little over $100 per share in 2007 and 2008 before falling to lows of $35 in 2009. Shares recovered to $95 at the start of 2011, but fell almost 30% from that point in time. Between 2008 and 2012, the company aggressively grew its revenues by more than 50% to $42-$43 billion. Net income remained roughly unchanged at $5.5 billion.

Investment Thesis

Investors are severely disappointed with the quarterly update. While the company did not provide an official outlook in terms of earnings per share, analysts expected Schlumberger to guide for fourth quarter earnings of $1.13 per share. This compares to earnings of $1.05 in the fourth quarter of 2011.

In that light, the downwards revision of $0.05-$0.07 per share is quite significant. A general poor performance across the board is impacting activity levels and earnings. The prospects for a near term recovery remain poor as weekly rig counts remain under pressure. Oil and natural gas inventories keep increasing, according to releases of Energy Department, despite the fact that winter has begun.

Investors seem to think that most of the problems are attributable to Schlumberger itself. As such the warning does not necessarily indicate a general industry-wide slump. Shares of Baker Hughes (BHI) fell 2.6% after the update from Schlumberger. Other oil and gas suppliers fared better. Shares of National-Oilwell Varco (NOV) fell 1.1%, while Halliburton (HAL) fell by 0.4%.

The long term prospects for suppliers, including Schlumberger remain favorable in an energy hungry world. The North American "shale" boom boosted demand for the company's services, but oversupply is impacting profitability at the moment.

Shares are fairly valued at these levels. Overcapacity continues to have a negative impact on the industry. Valued at 16-17 times annual earnings, the current price is fair. Yet, I see few triggers to pick up shares at these levels, given the current situation in the energy markets. The current 1.6% dividend yield is fairly low. On top of that, the company operates with a sizable debt position.

Source: Schlumberger - Disappointing Quarterly Update Triggers A Sell-Off