Schlumberger Limited (SLB) recently peaked after a nice 6 week climb. I believe it will continue to move up since the oil rig atmosphere tends to favor the growth of oil rig equipment service providers like Schlumberger. Let's take a look at what others think of the company and put together an income play on the stock.
Goldman Sachs is Bullish on SLB
Schlumberger was upgraded today by Goldman Sachs (GS) because it is of the opinion that the North American rig count is going to start entering a growth phase. The stock is presently trading at $74.59, and GS has given it a healthy price target of $95.00. There is a reason for Goldman Sachs' healthy outlook for the company and is giving it a growth projection of almost 20%!
Margins and pricing are becoming more favorable for rigging and this has created more activity both on and off shore. Global floating rigs are up 18% from 4Q2011 levels alone. The Baker Hughes (BHI) Rotary Rig Counts provide statistics on the number of active drilling rigs exploring or developing oil and natural gas in the U.S., Canada, and internationally. Look at these statistics:
- The international rig count for July 2012 was 1,264 up 114 from the 1,150 counted in July 2011
- U.S. rig count for July 2012 was 1,945 up 45 from the 1,900 counted in July 2011.
Move toward High-Tech Equipment for efficiency
One of the catalysts for growth of these types of companies is new regulations that encourage the use of high-specification equipment designed to increase efficiencies on the rigs. This is one of the reasons Schlumberger is growing as companies change out old equipment for newer more efficient types. Cameron International Corporation's (CAM), another competitor, is also growing with revenue outpacing the industry average. It is seeing a revenue growth of 18% as compared to the same period last year. This proves it is an industry wide phenomenon.
The stock reached a bottom in midsummer and has since then risen with the increase in oil prices. The high point it reached here in mid August (and appears to be sustaining) is significant. In early May, this was the peak before the stock turned bearish, so it is a strong resistance level. Will it continue through or will it bounce back? On the positive side, it appears to be building good support right at this level. If we observe the Bollinger Bands, we can see that the move up was very strong as it stayed above the middle band, which it is now touching.
But I would like to point out, the stock did not come back down to it; the band caught up with the stock as it moved sideways. This is by no means a signal of a slowdown. This is a good bullish support. As it has moved sideways, so far the RSI has also stayed in very bullish territory above 50, and this shows strength. Just before the peak, the MACD revealed a negative divergence which is a sign of resting, but I am not giving this much credence because it is the only sign of a slowdown. It simply could have meant a consolidation period is coming. It looks like the stock will hold here.
The Options Play
Presently trading at $74.59, it looks like the stock will hold here. Even though there are some headwinds in the natural gas industry that would be a concern, I believe the long term rig growth will keep the company moving up-even if we see a short term dip. For this reason I am looking at a bullish short term income play.
- Buy the January 2013 call with a strike of '75.00' (priced at $5.15)
- Sell the January 2013 call with a strike of '77.50' (priced at $3.85)
- Net Debit to Start: $1.30
- Maximum Profit: $1.20
- Maximum Risk: net debit
- Maximum Length of Trade: 5 months
Reasoning behind the Trade
- Growth in rig operations merits SLB's growth.
- Longer term trade protects against time decay in case of a dip in the price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.