Schlumberger Focuses on Its Oil Field Technology; I'm Raising My Target Price for This Pick
06/30/2014 10:35 am EST
Given this company's ability to consistently keep producing new technology that allows producers to find and develop oil and natural gas quicker, MoneyShow's Jim Jubak is raising his target price as of today, June 27.
Ever since I added Schlumberger (SLB) to the first Jubak Picks 50 portfolio in December 2008 (gain as of June 26 197.6%) and to the Jubak's Picks Portfolio in May 2012 (gain 81.26%), it's been my contention that Schlumberger should be valued as a technology stock and not as an energy stock.
Schlumberger's ability to produce new technologies that make finding and developing oil and natural gas faster and cheaper gives it a role in its industry more like that of a platform company such as Qualcomm (QCOM) in the technology sector than an oil services company such as National Oilwell Varco (NOV) in the energy sector. If that's true, I'd argue, Schlumberger should trade at a multiple more like the 19.5 price-to-earnings ratio of a Qualcomm than the 13.9 price-to-earnings ratio of a National Oilwell.
The market apparently agrees. Not only was the stock up 27.2% year-to-date as of June 25 to a price-to-earnings ratio of 23.2, but also the stock added another 1.99% on June 26 on positive reaction to the company's two-day investor conference that wrapped up yesterday.
The center piece of that conference? Presentations on Schlumberger's technology.
One piece of that was a presentation of the company's reorganization of its technology development process by Ashok Belani, executive vice president technology. Among Belani's points: Schlumberger has become an even more aggressive acquirer of new technology with 1,500 startup companies evaluated and 18 early stage companies acquired since 2008.
CEO Paal Kibsgaard's opening talk took on the key problem that rising capital spending for exploration and development hasn't produced a comparable increase in oil production. Free cash flow and operating margins at the top 10 exploration and production companies, consequently, have been on a steady downtrend since 2011. The solution to that, from Schlumberger's point of view, is new technology that will reduce costs for oil producers. Of course, since that's Schlumberger's strategy, you'd expect that argument. But a slide set that shows how the company has beaten oil service company competitors such as Baker Hughes (BHI) and Halliburton (HAL) like a drum from 2011 to 2013 does provide some convincing backup.
(You can find all the Schlumberger presentations on the company's site here.)
Yesterday analysts fell all over themselves to up their target price for Schlumberger. I saw increases to $127 from $117 from Cowan, to $140 from UBS, to $129 from $125 from RBC.
I think the bandwagon is the place to be on Schlumberger on momentum, fundamentals, and positioning. The stock closed at $116.12 on June 26. I'm going to raise my target price today to $131 from the current $120 a share.
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 managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I'll disclose my positions here.