Buy Schlumberger (SLB) in my Jubak’s Picks portfolio

Thanks to the euro debt crisis and worries that a slowing China will reduce global demand for oil, I’ve finally got my buying target for Schlumberger (SLB). (How’s that for positive thinking? Lemons into lemonade, I hope.)

I wrote in an April 20 post http://jubakpicks.com/2012/04/23/very-solid-earnings-from-schlumberger-slb-but-im-still-waiting-for-my-price/that at a price of $64 to $65 the stock would be discounting the current weakness in North American oil and gas exploration and drilling. Yesterday, May 17, the stock closed at $64.75. Today, as of 2:30 New York time, shares are trading at $64.49. Seems like a good price to me. So I’m adding the stock to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/  today.

Back on April 20 Schlumberger reported earnings of 98 cents a share. Revenue climbed by 21.7% from the first quarter of 2011.  International margins climbed to 19.1%, well above the 18% that Wall Street had expected. International margins are extremely important to Schlumberger. The most internationally oriented of all the oil service companies, Schlumberger gets two-thirds of its revenue from outside North America.

Which isn’t to say that North America isn’t important—33% of revenue is still a lot of revenue. And that’s where the problem lies for Schlumberger and all oil service companies at the moment. Read more

Report softly but carry a big stick at the conference call. That’s not advice from Teddy Roosevelt but my description of the first quarter earnings report Friday morning, April 20, from Schlumberger (SLB) and the afternoon conference call.

The April 20 earnings report was very solid and suggested that the slowdown in drilling in the North American land market would draw to a close in the second half of 2012 as expected.

But it wasn’t until the conference call that it became how definitely the current oil industry market is playing to Schlumberger’s strengths.

Schlumberger reported earnings of 98 cents a share, matching the consensus estimate from Wall Street analysts. Revenue climbed 21.7% year to year to $10.61 billion, slightly ahead of the Wall Street consensus of $10.54 billion. The first quarter is a seasonally weak quarter because winter weather slows drilling and exploration so earnings and revenue both fell sequentially in the first quarter from the fourth quarter of 2011.

What was interesting to me about the conference call is how much more bullish Schlumberger sounded than Halliburton (HAL), the competitor that reported first quarter results on Monday, April 18. Read more

Don’t throw out the baby with the bathwater.

The adage is useful in wide swathes of life. It’s certainly helped me more than once or twice in raising two children.

But as investing advice it’s often just plain wrong. The truth is that some of the time you would do well to throw out the baby with the bathwater.

Take Spanish bank stocks. No doubt about it, you would have been better off getting rid of them all in your portfolio back when the euro debt crisis hit. For example, Banco Santander (STD), my favorite Spanish bank stock even now sold in New York as an American Depositary Receipt (ADR) for $14.04 on January 15, 2010. You could have sold all Spanish bank stocks then when a new Greek government revealed that the Greek budget deficit for 2009 was 12.7% instead of 3.7%, thanks to some deceptive accounting. You could have sold at $10.42 on November 15. In November the European Union decided to bailout Ireland. On April 18, 2012, Banco Santander traded at $6.37.

Or take solar stocks. You would have been better off selling everything in that sector back in December 2011 when it became clear that all the cash-strapped governments of Europe—and the Germans too—were going to cut solar subsidies in 2012. First Solar (FSLR), for example sold for $47.99 a share on December 7, 2011 but closed on April 18 at $21.38.

Or shares of natural gas producers. You would have been better off selling off the entire sector sometime after natural gas prices peaked in the summer of 2009. Shares of Chesapeake Energy (CHK) traded at $27.27 on September 28, 2009. They closed at $18.11 on April 18, 2012.

By better off, I mean simply that in these instances an investor would have lost a lot less money by throwing out the baby with the bathwater and selling everything rather than either holding on in the belief that the carnage would soon be over or that some stocks in the sector would manage to escape the general blood-letting.

So why don’t we all and always get this call right? Why, for example, am I sitting on shares of Banco Santander and solar cell producer Yingli Green Energy (YGE), for example, in my Jubak’s Picks http://jubakpicks.com/the-jubak-picks/ and Dividend Income http://jubakpicks.com/jubak-dividend-income-portfolio/portfolios, respectively?

Because sometimes it’s hard to correctly identify the bathwater. And because sometimes it’s hard to know exactly how deep the bathwater will get. And sometimes because we want to make sure that we’ll be able to find the baby again when we want to.

Let’s see if recent history can teach us anything about doing a better job—by which I mean more profitable—with those babies and that bathwater. I think I’ve found five baby-and-the-bathwater rules worth considering for the next market crisis. Or for the next stage in any of the ongoing ones. Read more

Why there’s talk of $120 a barrel oil, maybe even $150–and three stocks to take advantage of that possibility

Oil week has just ended in London.

This year International Petroleum Week, the annual gathering of the oil industry, has been dominated by just one topic: Iran. And the talk focused not on the potential for war but on the consequences of the sanctions against Iran that have already been put in place.

From what I can judge from reports from the events that ended Wednesday night—my invite to the closing black-tie dinner seems to have been lost in the mail again—oil traders think that the sanctions against Iran will require the country to find new customers for 750,000 barrels of oil a day. That’s about a third of Iran’s daily exports last year. Traders see some prospects for Iran making up some of the slack from customers such as India, but the consensus is that there simply isn’t enough demand from new customers for Iranian oil and the Iranian industry is looking at production shutdowns.

Which, of course, leads to oil trader’s favorite sport—speculating on the price of oil. Read more

Now that oil is a long way from the $145 per barrel peak it hit in July 2008 and nobody on Wall Street is predicting, as Goldman Sachs did in 2008, that oil is headed to $250 a barrel, we’re not hearing much about peak oil anymore.

The peak oil model, initially developed by oil geologist King Hubbert and which accurately predicted a peak in U.S. oil production between 1965 and 1970, says that the production from an oil field grows exponentially over time, then peaks, and finally declines. The model has been applied to individual oil fields, national oil industries, and global oil production. Back in 2008, the fiercest proponents of peak oil as a global model were predicting that the world would start running out of oil sometime around 2020.

Now that the world is awash in oil, the only people talking about peak oil are its opponents, who are dancing on what they depict as the grave of what they call a “theory” that was never worth the graph paper it was plotted on.

Well, I still think that the peak oil model is the most useful description of what we see happening in the oil industry today—even if West Texas Intermediate, the U.S. benchmark, closed at a twitch under $100 a barrel on Friday, February 3. (Brent crude, the European benchmark closed at $114.58.)

And, I’d go on to say that the peak oil model is the best way to understand what’s happening to the prices of other commodities, especially copper.  (Full disclosure: I predicted that oil would go to $180 a barrel shortly before it began its collapse from the $145 a barrel high in 2008. And full, full disclosure: The only one predicting $250 a barrel oil right now is Iran, which is threatening that prices will reach that level if developed economies impose tougher sanctions on the Iranian economy in an attempt to slow or stop that country’s development of a nuclear bomb.)

And I think it’s even useful for thinking about how to invest in commodities such zs iron ore that, currently, don’t fit the peak oil model at all.

Let me explain why I still find so much value in this “discredited” theory. Read more