Update Schlumberger (SLB)

07/26/2011 3:27 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Yes, Schlumberger (SLB) beat on earnings ($0.87 instead of the $0.85 Wall Street expected) and on revenue ($9.62 billion instead of the estimated $9.3 billion) but the real news in the oil service giant’s July 22 quarterly earnings announcement was a return of pricing power.

Schlumberger reported seeing the ability to successfully raise prices across all its product groups and all its geographies. Pricing improvement started near the end of the second quarter in its international product lines and in liquids-rich drilling in North American shale formations. To Schlumberger this doesn’t look like a short-term trend. The company says that it sees an oil-and-gas-industry-wide shortage developing for oil field services. The shortage is a result of the boom in drilling in North America—especially the exploration and development of difficult geologies such as shale—and of the expansion of activity by international oil companies—again often in difficult geologies such as very deep sea drilling—in an effort to replace the oil lost to the Libyan civil war.

The potential oil services crunch is a result, in Schlumberger’s view, of simultaneous booms in North American and international exploration and development. Until recently declining activity in North American created a services supply buffer that supported international exploration and development without leading to an increase in oil service prices. The boom in North America set off by new finds of oil and natural gas in shale formations from Texas to the Appalachians has soaked up that buffer and looks like it will produce a shortage that will support higher prices.

Schlumberger didn’t report an increase in gross operating margin this quarter—at 20.6% it was essentially flat with the 21.6% reported in the second quarter of 2010. But if the pricing improvement that the company reported at the end of the second quarter runs for a while, margins will follow. That should produce quite an earnings bang in 2012. Standard & Poor’s raised its earnings estimate for 2011 to $3.75 a share from $3.69, and then jumped its earnings forecast by 23 cents a share to $5.28 in 2012.

I put a 12-month target price of $108 a share on the stock, which closed at $94.70 on July 25. That’s roughly a 12% gain from here. If you own the stock, I’d hold it (because I think it’s a very low risk way to make a 12% gain) and look to add shares on any pull back on general market volatility. If you don’t own shares, wait for a dip to $89 or so. That would give you a 20% gain to my target price. The stock pays a dividend yield of a little less than 1%. (The stock is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com// )

Full disclosure: I do not own shares of Schlumberger 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 March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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