Drilling into Value Plays

10/16/2014 8:00 am EST

Focus: STOCKS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Value investor J. Royden Ward sees long-term potential in the energy sector. Here, the editor of Cabot Benjamin Graham Value Investor, looks at an oil services firm and an out-of-favor oil driller.

Schlumberger (SLB)

Schlumberger is the world’s leading supplier of technology to the oil and natural gas industry providing the industry’s widest range of products and services from the beginning of exploration through final production for clients in 85 countries.

Advanced technology has become increasingly important, as existing oilfields mature and new oilfields are being developed in harsher environments and more challenging geological conditions.

Schlumberger is favorably positioned to take advantage of changing conditions in the energy sector that require the company’s technological leadership.

Following a temporary slow period, sales and earnings growth has been accelerating since 2009. Sales increased 7% and EPS rose 19% during the past four quarters.

I expect sales to rise 11% and EPS to climb 19% to $6.32 during the 12 months ending September 30, 2015. The large increase in the number of drilling rigs worldwide will require many of Schlumberger’s products and services.

SLB sells at 19.1 times current EPS with a dividend yield of 1.6%. I expect shares to rise to my minimum sell price target of $138.79 within one year.

Noble Corp. (NE)

Oil drillers ordered an unsightly number of new, more efficient oil rigs, which are being delivered and placed into service in 2014, 2015, and, to a lesser extent, in 2016. Now the Industry has way too many rigs.

Noble smartly offloaded their old rigs to a new company called Paragon (PGN), and spun it off to NE shareholders earlier this summer; the spinoff has strengthened Noble's position in the oil drilling industry because of its now-modern fleet.

The company will benefit mightily when the glut of oil rigs diminish and the demand begins to strengthen in 2016. That's a long way off but the 6.7% dividend yield will provide a decent return in the meantime.

NE is one of the most undervalued stocks that I follow. Its price ratios with P/E 5.7, P/BV 0.71, Dividend Yield 6.7%, and PEG ratio of 0.24 are extremely low.
NE's stock price could drop below $20 for a brief period, but the current price is unusually low. My minimum sell price target of $57.87 will not likely be reached in 2016 but could be reached in 2017.

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