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Gurus Dropped This Stock, Should You Pick It Up?

March 27, 2014 | About:

To explore and produce, a great investment is required in tools, and one of the leading equipment suppliers is Schlumberger (SLB). A key to remaining on top of the industry is innovation, and of that the company has a whole load. Throughout 2014 alone, the firm has introduced a microseismic surface acquisition system, a new fracturing technique for unconventional reserves, launched a degradable alloy technology to improve well productivity, a multilayer bed boundary detection service for clastic and carbonate fields, and a rotary steerable system that increases directional control and drilling efficiency. These product introductions have been done during the first quarter of 2014, making a strong statement about the company’s research and development pipeline. Gurus, however, mostly dropped the stock during the end of 2013. Let us see whether you can take advantage of the dumping and take a large position with long-term prospects.

Unequal growth

Schlumberger reported for 2013 an increase of over $4 billion in revenue year-over-over, with diluted earnings-per-share of $4.75 versus $4.01 in 2012. The growth has been pushed by onshore production in the Middle East and Asia, Europe and Asia, and Latin America area. The North America area, however, saw small decline in onshore production offset by a greater increase in offshore activities.

Management explained that land businesses in North America continued to experience pricing weakness in drilling, stimulation and wireline services, although the effect of this was partially offset by increased service intensity, improved efficiency, market share gains and new technology penetration.

Another important note concerning Schlumberger’s overall performance is the write-offs issued related to activities in Brazil. These have generated an unequal opportunity to secure profits in the short-term. In short, the company has understated its profits. The upside to this is the fast increase of earnings per share the firm is experiencing. However, given the 13.25% annual returns since 2004 shareholders received, the question that remains is whether such figures will last long enough to take a strong position.

Long-Term Growth

The advantage gurus hold over regular investors is cash leverage. That alone allows gurus to make a profit in the short-term, even if the change in stock price is minimum. Hence, a regular investor has to think more when looking for an appropriate investment. And if dedication is part-time, then a long-term investment is all the more intelligent as it will allow her to be comfortable. A tip is given by the increasing positions during all of 2013 by the two largest gurus holding a position in Schlumberger.

The company is expected to benefit from current trends in oilfield services in North America, as drilling moves from onshore to offshore. Also, the outlook for 2014 remains largely bullish on an improved global economic scenario. Hence, higher demand for its products is expected to come primarily from the Mexican Gulf. An additional and greater push is expected by the remaining geographies as demand for oil continues to rise worldwide.

The greatest downside to Schlumberger is its exposure to the North America region. Here, activities have lagged while the production at other geographies continue to rise. So, the steady purchases by gurus are looking again for short-term profits. The reasoning behind the statement is that as long as the company does not reduce exposure to North America, profits in the long run will be scarce to none.

Moreover, Schlumberger cannot expect to reverse the trend through the introduction of new products that improve current techniques. Those products must revolutionize the industry if the trend wants to be reversed. Hence, the risk associated with the stock is evidenced on the carried 18% discount to the industry average, while trading at 18.7 times its trailing earnings.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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