Schlumberger Ltd. (SLB) provides oil and gas drilling and exploration companies technologically advanced equipment and management services. Like many companies in this industry, lower oil prices will eventually catch up with this company and there is a good chance the stock will move lower. Are bullish times ending for this stock?
SLB has done very well, surpassing the industry average of 13.2% in revenue growth for the year. It comes in at 16.7%. Its debt-equity ratio is below the industry average and management has done quite well improving on the returns on equity year over year. It improved earnings per share by 27.2% in the most recent quarter compared to the same quarter a year ago. This demonstrated a pattern of positive earnings per share growth over the past two years and this trend should continue.
Even though the company appears to be doing well, the suppressed oil prices may have an influence upon SLB as well as other oil field service companies like Halliburton (HAL). Oil appears to be headed down - at least in the short term. There is speculation Saudi Arabia will pump more oil. The White House said they would release reserves to keep prices low. And the Bernanke/Draghi team unleashed their bond buying plans already. Some believe that September 17th is the date of the last oil bull run.
Following the markets, the stock rose through mid summer before forming a plateau for most of August. It dipped in early September only to bounce back on a resurge above the plateau level of 75.7 and it presently dipped again and is trading at 73.58. Observations tend to point to the 50 day MA as a possible new support level. The stock is still showing strength in the RSI indicator as the dips have barely moved under the "50" bearish level on dips. The MACD remains mildly in bullish territory which is understandable as the stock has moved sideways for a number of weeks consolidating its latest position. From observing the chart, I would say the stock looks neutral to mildly bullish.
The Option Play
The stock is presently trading at 73.58 and as I look at a short term income play, my observations would say look at a bullish play. But I am concerned that dropping oil prices will have an adverse affect upon the stock in the short term. For this reason, I am going to take a short term bearish position in an income play.
- Buy a January 2013 put with a strike of '75.00' (priced at $5.35)
- Sell a January 2013 put with a strike of '72.50' (priced at $4.00)
- Net Debit to Start: $1.35
- Maximum Profit: $1.15
- Maximum Risk: net debit
- Maximum Length of Play: 4 months
Reasoning behind the trade
- Continued dropping oil processes affecting oil stocks
- Short term drop off is highly likely