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Update: Schlumberger

posted on September 12, 2015 at 5:31 pm
Oil rigs - land

Update September 11, 2015: The consensus on Schlumberger’s (SLB) $14.8 billion bid to buy Cameron International (CAM) is that it’s a call by Schlumberger on a bottom in the oil sector. If it were that justifies the 56% premium that Schlumberger has offered in the deal.

But I’ve got an alternative and less hopeful take. I think the deal testifies to Schlumberger’s belief that capital spending budgets in the oil sector have a lot further to fall—and that to stand any chance of grabbing a bigger piece of this smaller pie, oil service and equipment companies that to be able to offer services and equipment that will help oil producers wring more costs out of their capital spending.

That’s exactly what the acquisition by the world’s premier oil service company of a great oil hardware company promises. Cameron is the world’s largest provider of surface wellheads, the   set of values that sits on top of an oil well and controls the flow through the well from the oil reservoir. Schlumberger and Cameron have an existing joint venture so the two companies have a good idea of how to combine Schlumberger’s engineering and digital mapping services with Cameron’s hardware. (Unlike the proposed deal that would combine the second and third oilfield services companies (Halliburton (HAL) and Baker Hughes (BHI) this deal isn’t likely to face extensive review by the Justice Department because Cameron sells hardware while Schlumberger sells services.) The Schlumberger/Cameron joint venture, OneSubsea, was set up in 2012 to offer better performance at a lower cost than offered by hardware and service companies operating independently. I think it’s safe to say that the joint venture worked well enough so that Schlumberger wanted to buy all of Cameron at such a substantial premium. (Credit Suisse projects that OneSubsea will see growing revenue in 2015—not exactly the typical oil sector story. One reason the price was so high is that Cameron, unlike most of the oil sector, hasn’t been pummeled. Shares of Cameron are down just 10.57% for 2015 through the close on September 11 and up 29.07% over the last year. The stock’s September 11 closing price of $64.47 isn’t all that far below 5-year high of 2014 $74.33 set on August 29, 2014.)

Schlumberger’s logic in this acquisition is based on continued pressure on capital budgets at oil producers. A big oil company executive recently told an industry conference, Credit Suisse reported on September 11, that the oil industry currently requires $70 billion in cash flow to grow production. But pressures on oil companies to lower costs could see that number fall to $50 billion over the next few quarters. Over that time period, then, oil service and oil hardware companies are looking at a shrinking market. To grow revenue and profits oil service and hardware companies will have to win a bigger share of a smaller pie by enabling oil producers to reach their lower cost targets.

Schlumberger has a history of acquiring joint partners—as in the 2010 deal for Smith International. I think that gives investors reasonable confidence in Schlumberger’s ability to integrate two companies and deliver the numbers they’ve promised Wall Street. The deal, according to Schlumberger, is expected to be accretive to earnings in the first year after closing and to generate $900 million in cost savings and other synergies in the first two years after the deal closes in the first quarter of 2016.

Besides all these reasons for likely this deal, I think it confirms that Schlumberger is holding to its historic discipline of buying when its sector is in the dumps in order to pick up market share at the top of the cycle. There aren’t many cyclical companies that are so sure of their judgment that they’re willing to spend big at the bottom of the cycle. Diesel engine maker Cummins (CMI) comes to mind, but not very many other names. Both Cummins and Schlumberger are in my long-term Jubak Picks 50 portfolio.

(My apologies that everything is running late today but I’ve managed to acquire my first autumn cold in the last few days.)

Update Schlumberger

posted on June 28, 2015 at 4:03 pm
oil_rig_sea

Update January 20, 2015. Today, January 20, Schlumberger (SLB) announced that it will pay $1.7 billion for a 46% stake in Eurasia Drilling (EDCL in London), Russia’s largest drilling company. Schlumberger can buy the rest of Eurasia Drilling three years after the deal closes.

This is exactly the kind of long-term thinking that a patient investor with a long-term time horizon wants to see from a company. Schlumberger is able to look past the current plunge in oil prices and the current sanctions on Russia’s oil industry, imposed as a result of the war in Ukraine, to see the time when today’s oil surplus has again turned into a deficit and when the world is again willing to invest in tapping (and modernizing) Russia’s huge oil reserves.

But Schlumberger’s move throws the dilemma facing investors now into stark relief. Do you want to be; can you be as patient as Schlumberger? Current forecasts of oil prices suggest that markets won’t see a recovery in oil prices until the second half of 2015 and that even then the increase in oil prices might only be to $65 or $60 a barrel from the current $45 a barrel. And a number of forecasts predict that oil prices will stagnate or even retreat again in the first half of 2016 as oil that has been pumped into storage tanks and oil tankers comes back on the market in response to higher prices.

Wouldn’t it be better to wait until a mid-2015 recovery in oil prices is visible before buying Schlumberger? Or maybe even wait until that second dip, if it happens, in 2016?

What you think of Schlumberger (SLB) now depends on two things.

First, it depends on how far away you think any recovery is for oil prices and the oil industry. (For more on that topic see my January 14 post http://jubakam.com/2015/01/when-might-oil-bottom-how-fast-will-the-recovery-be-and-understanding-the-strange-economics-of-oil/ )

Second, it depends on your strategy for building an energy sector position for the eventual recovery in the sector. (Schlumberger is a member of both my Jubak’s Picks 12-18 month portfolio and my long-term Jubak Picks 50 portfolio http://jubakam.com/portfolios/ )

Let me start with the first “it depends” and then move onto “it depends” number 2.

On January 15, the company reported earnings of $1.50 a share for the fourth quarter of 2014—excluding “special items.” That $1.50 a share was 4 cents a share above Wall Street estimates. Revenue rose 6.2% year over year to $12.64 billion, matching the consensus from analysts.

Two caveats on that earnings beat, for course.

First, those “special items” for the quarter included a $1.77 billion pre-tax charge for cutting 9,000 jobs ($296 million) and an $806 million charge for writing down the value of offshore seismic survey ships. I’m not sure that I’d call these “special items” since that implies that they won’t be repeated next quarter and the quarter after that.

Second, those earnings and the earnings surprise are backward looking—that is, they reflect what Schlumberger’s business was like in the last three months of 2014. Here I’d pay special attention to the difference between Schlumberger’s confidence in its October guidance after third quarter earnings and the company’s clear expression of uncertainty in the January conference call.

In October Schlumberger said falling oil prices—what it characterized as fears of “short-term over-supply”–won’t have a significant impact on its business. “Our view of the overall market continues to include a mix of economic and geopolitical headwinds and tailwinds,” said CEO Paal Kibsgaard. (October’s guidance was itself quite different from the company’s June outlook, which was based on oil at $100 a barrel.)

The tone was markedly different in the company’s January 16 conference call. In that call Schlumberger said it anticipates lower spending by customers this year—which is why is cutting its workforce by 7%. “In this uncertain environment, we continue to focus on what we can control,” said CEO Kibsgaard. “We have already taken a number of actions to restructure and resize our organization.”

The problem facing Schlumberger, Wall Street analysts, and investors is that estimates of spending plans for 2015 are still a guess. Less than half of the 150 oil and gas companies it follows, Invesco portfolio manager Norman MacDonald told Bloomberg, have reported spending plans for the year. Competitor Halliburton (HAL), which reported on January 20, confirmed those negative trends in the market. The company, which has much more exposure to the North American market than Schlumberger does, reported that the drilling rig count has fallen by 15% recently in the United States and that it expects the rate of decline to accelerate.

Right now Wall Street analysts are projecting first quarter revenue of $113 billion for Schlumberger—which would be significantly lower than the $12.6 billion in the fourth quarter, and earnings per share of $1.16 vs. the $1.50 a share, before special items, in the just completed quarter.

So what do you do with Schlumberger?

I think the stock remains a core energy sector holding in a long-term portfolio. The company’s technology edge and its dominant market position in many of its markets haven’t been impaired during the current oil price plunge. Company management is correct in targeting this downturn in the sector as a time to pick up market share and I like the company’s attitude that the merger of Halliburton and Baker Hughes (BHI) is an opportunity to pick up market share. Schlumberger stays in my long tern Jubak 50 portfolio.

On the other hand, I think it’s worth re-evaluating Schlumberger’s role in a more aggressive, short to medium term portfolio. The very solidness that makes the stock such an attractive long-term holding means that it hasn’t declined as much (a good thing) as some of more leveraged and risky holdings in the sector—deep sea drillers such as Ensco (ESV) and SeaDrill (SDRL), for example—but that it won’t show as big a gain (a bad thing) when sometime after the middle of the year investors get evidence that the energy sector is rebounding and that some of the stocks that have been hammered hardest are about to show the biggest gains. At that moment I’d like to own shares that have been beaten down more and that have biggest upside (because of their higher current risk) than Schlumberger. To give me the cash to buy those short and medium term plays in June or so, I’d sell Schlumberger out of a short to medium term portfolio now. (So, yes, I will be selling Schlumberger out of Jubak’s Picks on Wednesday, January 21.)

Let me make clear the strategic assumptions behind this particular call on Schlumberger. I’m suggesting dividing your energy position into two pieces, one devoted to companies that are focused on using this down turn in the sector to increase dominant long-term positions and the other devoted to riskier shares that have been pounded more in this oil-price plunge and that, therefore have even bigger upside potential when this downturn ends. How you divide your own energy position between those two poles depends on your own risk/reward profile. I can see some investors going all for the Schlumbergers of the energy sector. I can see others with portfolios more heavily weighted toward the recently pounded.

Update Schlumberger

posted on February 1, 2015 at 4:12 pm
oil_rig_sea

Update January 20: Today, January 20, Schlumberger (SLB) announced that it will pay $1.7 billion for a 46% stake in Eurasia Drilling (EDCL in London), Russia’s largest drilling company. Schlumberger can buy the rest of Eurasia Drilling three years after the deal closes.

This is exactly the kind of long-term thinking that a patient investor with a long-term time horizon wants to see from a company. Schlumberger is able to look past the current plunge in oil prices and the current sanctions on Russia’s oil industry, imposed as a result of the war in Ukraine, to see the time when today’s oil surplus has again turned into a deficit and when the world is again willing to invest in tapping (and modernizing) Russia’s huge oil reserves.

But Schlumberger’s move throws the dilemma facing investors now into stark relief. Do you want to be; can you be as patient as Schlumberger? Current forecasts of oil prices suggest that markets won’t see a recovery in oil prices until the second half of 2015 and that even then the increase in oil prices might only be to $65 or $60 a barrel from the current $45 a barrel. And a number of forecasts predict that oil prices will stagnate or even retreat again in the first half of 2016 as oil that has been pumped into storage tanks and oil tankers comes back on the market in response to higher prices.

Wouldn’t it be better to wait until a mid-2015 recovery in oil prices is visible before buying Schlumberger? Or maybe even wait until that second dip, if it happens, in 2016?

What you think of Schlumberger (SLB) now depends on two things.

First, it depends on how far away you think any recovery is for oil prices and the oil industry. (For more on that topic see my January 14 post http://jubakam.com/2015/01/when-might-oil-bottom-how-fast-will-the-recovery-be-and-understanding-the-strange-economics-of-oil/ )

Second, it depends on your strategy for building an energy sector position for the eventual recovery in the sector. (Schlumberger is a member of both my Jubak’s Picks 12-18 month portfolio and my long-term Jubak Picks 50 portfolio http://jubakam.com/portfolios/ )

Let me start with the first “it depends” and then move onto “it depends” number 2.

On January 15, the company reported earnings of $1.50 a share for the fourth quarter of 2014—excluding “special items.” That $1.50 a share was 4 cents a share above Wall Street estimates. Revenue rose 6.2% year over year to $12.64 billion, matching the consensus from analysts.

Two caveats on that earnings beat, for course.

First, those “special items” for the quarter included a $1.77 billion pre-tax charge for cutting 9,000 jobs ($296 million) and an $806 million charge for writing down the value of offshore seismic survey ships. I’m not sure that I’d call these “special items” since that implies that they won’t be repeated next quarter and the quarter after that.

Second, those earnings and the earnings surprise are backward looking—that is, they reflect what Schlumberger’s business was like in the last three months of 2014. Here I’d pay special attention to the difference between Schlumberger’s confidence in its October guidance after third quarter earnings and the company’s clear expression of uncertainty in the January conference call.

In October Schlumberger said falling oil prices—what it characterized as fears of “short-term over-supply”–won’t have a significant impact on its business. “Our view of the overall market continues to include a mix of economic and geopolitical headwinds and tailwinds,” said CEO Paal Kibsgaard. (October’s guidance was itself quite different from the company’s June outlook, which was based on oil at $100 a barrel.)

The tone was markedly different in the company’s January 16 conference call. In that call Schlumberger said it anticipates lower spending by customers this year—which is why is cutting its workforce by 7%. “In this uncertain environment, we continue to focus on what we can control,” said CEO Kibsgaard. “We have already taken a number of actions to restructure and resize our organization.”

The problem facing Schlumberger, Wall Street analysts, and investors is that estimates of spending plans for 2015 are still a guess. Less than half of the 150 oil and gas companies it follows, Invesco portfolio manager Norman MacDonald told Bloomberg, have reported spending plans for the year. Competitor Halliburton (HAL), which reported on January 20, confirmed those negative trends in the market. The company, which has much more exposure to the North American market than Schlumberger does, reported that the drilling rig count has fallen by 15% recently in the United States and that it expects the rate of decline to accelerate.

Right now Wall Street analysts are projecting first quarter revenue of $113 billion for Schlumberger—which would be significantly lower than the $12.6 billion in the fourth quarter, and earnings per share of $1.16 vs. the $1.50 a share, before special items, in the just completed quarter.

So what do you do with Schlumberger?

I think the stock remains a core energy sector holding in a long-term portfolio. The company’s technology edge and its dominant market position in many of its markets haven’t been impaired during the current oil price plunge. Company management is correct in targeting this downturn in the sector as a time to pick up market share and I like the company’s attitude that the merger of Halliburton and Baker Hughes (BHI) is an opportunity to pick up market share. Schlumberger stays in my long tern Jubak 50 portfolio.

On the other hand, I think it’s worth re-evaluating Schlumberger’s role in a more aggressive, short to medium term portfolio. The very solidness that makes the stock such an attractive long-term holding means that it hasn’t declined as much (a good thing) as some of more leveraged and risky holdings in the sector—deep sea drillers such as Ensco (ESV) and SeaDrill (SDRL), for example—but that it won’t show as big a gain (a bad thing) when sometime after the middle of the year investors get evidence that the energy sector is rebounding and that some of the stocks that have been hammered hardest are about to show the biggest gains. At that moment I’d like to own shares that have been beaten down more and that have biggest upside (because of their higher current risk) than Schlumberger. To give me the cash to buy those short and medium term plays in June or so, I’d sell Schlumberger out of a short to medium term portfolio now. (So, yes, I will be selling Schlumberger out of Jubak’s Picks on Wednesday, January 21.)

Let me make clear the strategic assumptions behind this particular call on Schlumberger. I’m suggesting dividing your energy position into two pieces, one devoted to companies that are focused on using this down turn in the sector to increase dominant long-term positions and the other devoted to riskier shares that have been pounded more in this oil-price plunge and that, therefore have even bigger upside potential when this downturn ends. How you divide your own energy position between those two poles depends on your own risk/reward profile. I can see some investors going all for the Schlumbergers of the energy sector. I can see others with portfolios more heavily weighted toward the recently pounded.

Sell Schlumberger (SLB)

posted on February 1, 2015 at 4:10 pm
oil_rig_sea

Today, January 20, Schlumberger (SLB) announced that it will pay $1.7 billion for a 46% stake in Eurasia Drilling (EDCL in London), Russia’s largest drilling company. Schlumberger can buy the rest of Eurasia Drilling three years after the deal closes.

This is exactly the kind of long-term thinking that a patient investor with a long-term time horizon wants to see from a company. Schlumberger is able to look past the current plunge in oil prices and the current sanctions on Russia’s oil industry, imposed as a result of the war in Ukraine, to see the time when today’s oil surplus has again turned into a deficit and when the world is again willing to invest in tapping (and modernizing) Russia’s huge oil reserves.

But Schlumberger’s move throws the dilemma facing investors now into stark relief. Do you want to be; can you be as patient as Schlumberger? Current forecasts of oil prices suggest that markets won’t see a recovery in oil prices until the second half of 2015 and that even then the increase in oil prices might only be to $65 or $60 a barrel from the current $45 a barrel. And a number of forecasts predict that oil prices will stagnate or even retreat again in the first half of 2016 as oil that has been pumped into storage tanks and oil tankers comes back on the market in response to higher prices.

Wouldn’t it be better to wait until a mid-2015 recovery in oil prices is visible before buying Schlumberger? Or maybe even wait until that second dip, if it happens, in 2016?

What you think of Schlumberger (SLB) now depends on two things.

First, it depends on how far away you think any recovery is for oil prices and the oil industry. (For more on that topic see my January 14 post http://jubakam.com/2015/01/when-might-oil-bottom-how-fast-will-the-recovery-be-and-understanding-the-strange-economics-of-oil/ )

Second, it depends on your strategy for building an energy sector position for the eventual recovery in the sector. (Schlumberger is a member of both my Jubak’s Picks 12-18 month portfolio and my long-term Jubak Picks 50 portfolio http://jubakam.com/portfolios/ )

Let me start with the first “it depends” and then move onto “it depends” number 2.

On January 15, the company reported earnings of $1.50 a share for the fourth quarter of 2014—excluding “special items.” That $1.50 a share was 4 cents a share above Wall Street estimates. Revenue rose 6.2% year over year to $12.64 billion, matching the consensus from analysts.

Two caveats on that earnings beat, for course.

First, those “special items” for the quarter included a $1.77 billion pre-tax charge for cutting 9,000 jobs ($296 million) and an $806 million charge for writing down the value of offshore seismic survey ships. I’m not sure that I’d call these “special items” since that implies that they won’t be repeated next quarter and the quarter after that.

Second, those earnings and the earnings surprise are backward looking—that is, they reflect what Schlumberger’s business was like in the last three months of 2014. Here I’d pay special attention to the difference between Schlumberger’s confidence in its October guidance after third quarter earnings and the company’s clear expression of uncertainty in the January conference call.

In October Schlumberger said falling oil prices—what it characterized as fears of “short-term over-supply”–won’t have a significant impact on its business. “Our view of the overall market continues to include a mix of economic and geopolitical headwinds and tailwinds,” said CEO Paal Kibsgaard. (October’s guidance was itself quite different from the company’s June outlook, which was based on oil at $100 a barrel.)

The tone was markedly different in the company’s January 16 conference call. In that call Schlumberger said it anticipates lower spending by customers this year—which is why is cutting its workforce by 7%. “In this uncertain environment, we continue to focus on what we can control,” said CEO Kibsgaard. “We have already taken a number of actions to restructure and resize our organization.”

The problem facing Schlumberger, Wall Street analysts, and investors is that estimates of spending plans for 2015 are still a guess. Less than half of the 150 oil and gas companies it follows, Invesco portfolio manager Norman MacDonald told Bloomberg, have reported spending plans for the year. Competitor Halliburton (HAL), which reported on January 20, confirmed those negative trends in the market. The company, which has much more exposure to the North American market than Schlumberger does, reported that the drilling rig count has fallen by 15% recently in the United States and that it expects the rate of decline to accelerate.

Right now Wall Street analysts are projecting first quarter revenue of $113 billion for Schlumberger—which would be significantly lower than the $12.6 billion in the fourth quarter, and earnings per share of $1.16 vs. the $1.50 a share, before special items, in the just completed quarter.

So what do you do with Schlumberger?

I think the stock remains a core energy sector holding in a long-term portfolio. The company’s technology edge and its dominant market position in many of its markets haven’t been impaired during the current oil price plunge. Company management is correct in targeting this downturn in the sector as a time to pick up market share and I like the company’s attitude that the merger of Halliburton and Baker Hughes (BHI) is an opportunity to pick up market share. Schlumberger stays in my long tern Jubak 50 portfolio.

On the other hand, I think it’s worth re-evaluating Schlumberger’s role in a more aggressive, short to medium term portfolio. The very solidness that makes the stock such an attractive long-term holding means that it hasn’t declined as much (a good thing) as some of more leveraged and risky holdings in the sector—deep sea drillers such as Ensco (ESV) and SeaDrill (SDRL), for example—but that it won’t show as big a gain (a bad thing) when sometime after the middle of the year investors get evidence that the energy sector is rebounding and that some of the stocks that have been hammered hardest are about to show the biggest gains. At that moment I’d like to own shares that have been beaten down more and that have biggest upside (because of their higher current risk) than Schlumberger. To give me the cash to buy those short and medium term plays in June or so, I’d sell Schlumberger out of a short to medium term portfolio now. (So, yes, I will be selling Schlumberger out of Jubak’s Picks on Wednesday, January 21.)

Let me make clear the strategic assumptions behind this particular call on Schlumberger. I’m suggesting dividing your energy position into two pieces, one devoted to companies that are focused on using this down turn in the sector to increase dominant long-term positions and the other devoted to riskier shares that have been pounded more in this oil-price plunge and that, therefore have even bigger upside potential when this downturn ends. How you divide your own energy position between those two poles depends on your own risk/reward profile. I can see some investors going all for the Schlumbergers of the energy sector. I can see others with portfolios more heavily weighted toward the recently pounded.

Margins and cash flow keep climbing at Schlumberger

posted on April 21, 2014 at 3:54 pm
excited-oil-worker_470x260

It’s swell that on April 17 Schlumberger (SLB) beat Wall Street earnings estimates of $1.20 a share for the first quarter by a penny a share. Earnings increased 25% from the first quarter of 2013. The company reported a sequential 6% decline in revenue, due primarily to slowdowns related to bad weather in Russia, China, and North America. Year over year revenue climbed by 6%. To get 25% earnings growth out of a 6% increase in revenue, a company has to be killing on margins. Year over year pre-tax operating margin climbed by 2.48 percentage points. Return on invested capital climbed again to 13.3%.

But the eye-popping number, to me, anyway, was free cash flow. In the quarter Schlumberger recorded $688 million in free cash flow. In 2013 the company generated $5.5 billion in free cash flow and it looks like Schlumberger will show $5.6 billion in free cash flow in 2014.

And the company seems very certain that the current level of margins and cash flow will continue for a while. Schlumberger announced that it would accelerate the execution of its $10 billion stock buy-back program to 2.5 years instead of the earlier projected 5 years. (The company will also pay a quarterly dividend of 40 cents a share to shareholders of record as of June 4.)

I think it’s safe to say that Schlumberger is in a sweet spot. That’s a result not so much of a big upsurge in drilling activity—revenue growth of 6% isn’t a big upsurge—but of increased profit margins that result from the kind of work that oil companies are hiring Schlumberger to do. Increasingly the company’s contracts are for integrated oil field management where a company—either drilling in onshore shale geologies or offshore in deep waster—is hiring Schlumberger to do it all. And in return for contracts that shift some of the risk of meeting production goals to Schlumberger, the oil services company is seeing fatter margins and production sharing agreements. That’s the character of the three-multiyear contracts that Mexico’s Pemex just awarded to Schlumberger with a value of $1.9 billion. The trend toward integrated management contracts also gives Schlumberger an added competitive advantage over smaller oil services companies that can’t do it all.

Schlumberger is a member of both my 12-18 month Jubak Picks portfolio and my long-term Jubak 50 portfolio. As of today, April 21, I’m raising my target price in the Jubak Picks portfolio to $120 a share by October 2014 from my current target of $107 a share. The stock traded at $101.65 today, April 21, at 3:30 p.m. New York time. (Schlumberger does have exposure to the Russian oil and gas industry so any further sanctions against Russia because of escalating pressure by Russia on Ukraine could certainly ding the stock. I’d regard that as an opportunity to pick up more shares.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Schlumberger as of the end of December. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.



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