There are times when the questions seem to be wielding bazookas and the answers butter knives. In these times we have found that the most profitable action we can make is to focus on what we can know, not dwell on the myriad of issues that no one appears to know. You may have heard us refer to this as identifying the Big Dumb Trends.
Earlier this week we emailed to our clients a multiple page analysis of our how we believe the unfolding events in Japan would impact the worldwide economy. In looking at many major disasters over the last 20 years, we cannot find lasting economic effects from such disasters. In short, the devastation is counterbalanced by the rebuilding process. The cost of human suffering is high and gut wrenching, but the economies of the afflicted region and the world have not been materially affected, as long as adequate capital was available for the rebuilding. Based on what we know today, we believe this will be the case in Japan.
Please forgive us if we sound insensitive. You know us well enough to understand that that is not our intention. Our goal in this blog is to refocus our attention away from the carnage that has befallen our friends in Japan and view a world that is inhabited by 6 billion people and a world that will go on.
Then what is the single most obvious "answer" for the future that we can glean from the disaster in Japan. We believe that answer is obvious and it is the definition of a Big Dumb Trend. Nuclear energy as an alternative to fossil based energy will likely go into a long period of under utilization. Couple that with the unrest in oil-rich North Africa and the Middle East and you come to one conclusion: Oil prices are not coming down anytime soon, and will probably trend higher once the economies of the world move to a higher growth rate. Alternative energy will continue to draw lots of talk and lots of dollars, but the questions these technologies offer have been muted by just as many questions.
Oil and gas will continue to play an out-sized role in the energy needs of the whole world. If that is the case, what is the best way to play energy? Buying oil and gas stocks is an easy answer, and we believe will be profitable. But in zeroing in on the best idea we have at this point, we arrive at the oil field services companies.
They will benefit in two ways. 1) There will be more highly technical-deep drilling (expensive), 2) There will be tremendous retro-drilling in former productive fields in areas that were thought to be tapped out. New technologies are showing good results in this retro-drilling field.
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Simplifying our idea even further, we believe the best company for the future we see unfolding is Schlumberger LTD. (SLB).
Our reason is simple. SLB is the largest oil-field services company in the world and possesses a unique position in the industry. They have what we call the "Goldman Sachs" (GS) advantage; that is, they get invited to bid in every major drilling activity. They don't win every contract, but they see them all and if you get invited to the table often enough, you can pick and choose the ones you want to gear up for. SLB has done that for years, and we believe, they will continue to do so to their shareholders benefit.
Our Dividend Valuation Model says SLB is about 20+% undervalued. As you know our valuation model identifies how the market has priced SLB's dividend growth over the years. Right now, even in the face of all the uncertainties related to energy, our model says the company is undervalued and we have been buying it. SLB has raised its dividend over 10% per annum over the past decade. Last year it raised its dividend by nearly 19%. We predict dividend increases in the 12%-14% over the next 3-5 years.
We'll have more to say on the energy situation and opportunities both obvious and not so obvious in future blogs.
With regard to the Japanese people and the people in the region, we lift up our prayers to God for mercy and resolution of the current travail.
Disclosure: We own Schlumberger LTD.