Buy Schlumberger (SLB) in my Jubak's Picks portfolio
05/18/2012 3:23 pm EST
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/ 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. The continued low, low prices for U.S. natural gas has led North American producers to cut back on exploration and drilling. North American producers of oil and natural gas liquids are picking up a good bit of the slack, but switching rigs and activity from natural gas fields in places like the eastern Marcellus shale formations to liquid-rich areas in the West takes time and has resulted in a slump in activity as companies move rigs and gear. For 2012 Schlumberger’s North American land revenue might see growth as low as 3% before picking up to a 10% growth rate in 2013.
It’s that slowdown and the possibility that it could last a quarter or two longer than current projections of a bottom in the June quarter that have led me to wait for a lower entry price. But at $64 to $65 I think I’ve got solid protection against that fundamental risk. (The macroeconomic risk in this market is another matter, but I think it would take an unlikely drop in oil prices to $85 a barrel or less to significantly reduce oil company capital budgets. With Russia and Saudi Arabia both needing oil prices of $95 to $105 a barrel to balance their government budgets that kind of price drop seems unlikely.)
I’m setting a 12-month target price of $88 a share. The stock pays a 1.7% dividend and trades at 16.5 times trailing 12-month earnings per share and 15 times projected 2012 earnings per share. The PEG (PE to earnings growth rate) is a very reasonable 0.84.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Schlumberger as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/