SLB:NYSE – August 10, 2009: $53.34 - 11:35 AM EST
52-week range: $35.05 (Feb. 23, 2009) - $100 (Aug. 21, 2008)
Dividend = $0.21 quarterly = 1.57% current yield
Schlumberger is a world leader in oilfield services with operations in 80 countries. 78% of 2008 revenues were derived from outside North America.
SLB saw huge sales and earnings gains during 2005 – 2008 as oil prices peaked. Zacks now expects earnings to fall from last year’s record of
$4.42 /share to about $2.61 /share this year. The obvious ‘bad news’ seems reflected in the price already with SLB shares down from 2007 – 2008 peaks of $114 and $112 to today’s $53.35 quote.
The dividend has been raised in each year since 2005 and now offers a 1.57% current yield- the best on SLB since 2003. It is well covered at a payout ratio of only 32% of the already reduced estimate.
Value Line assigns SLB an ‘A+’ financial strength and an ‘above average’ safety rating. These have never been ‘cheap’ shares with the 10-year median P/E at 31x. Even during 2008’s oil price peak (when you’d expect a cyclically low multiple) SLB commanded 18.5x earnings.
With oil prices now more likely to rise than fall, I think SLB will probably see both higher earnings and a higher multiple over the next few years.
Here’s a nice way to play Schlumberger out to January of 2011 that allows for a very nice total return with less risk than simply purchasing the shares outright.
.................................................Cash Outflow............ Cash Inflow
Buy 1000 SLB @$53.35 .................. $53,350
Sell 10 Jan. 2011 $55 Calls @$10.00 .............................. $10,000
Sell 10 Jan. 2011 $55 Puts @$11.90 .............................. $11,900
Net Cash out-of-Pocket .................. $31,450
If SLB shares climb by at least 3.1% to $55 by expiration date:
• The $55 calls will be exercised.
• You will sell your shares for $55,000.
• The $55 puts will expire worthless.
• You will likely have collected $1,260 in dividends.
• You will have no further option obligations.
• You will end up with no shares and $56,260 in cash.
That’s a best-case scenario total return of $24,810 / $31,450 = 78.8%
achieved on shares that only needed to rise by 3.1% or more.
Not a bad return on a somewhat conservative stock for a bit less
than 18 months.
What’s the risk?
If SLB shares stay below $55 through expiration date:
 The $55 calls will expire worthless.
 The $55 puts will be exercised.
 You will be forced to buy an additional 1000 SLB.
 You will need to lay out another $55,000 in cash.
 You will likely have collected $1,260 in dividends.
 You will have no further option obligations.
 You will end up with 2000 SLB and $1,260 in cash.
What’s the break-even point on the whole trade?
On the first 1000 shares it’s their $53.35 purchase price less
the $10 /share call premium = $43.35 /share.
On the ‘put’ shares it’s the $55 strike price less the
$11.90 /share put premium = $43.10 /share.
Your 2000 shares would have an average cost of $43.225 (excluding dividends) and $42.595 /share (including yield).
SLB shares could decline by up to $10.75 /share (-20%) from your original purchase price without causing a loss on this trade.
Disclosure: Author is long SLB shares and short SLB options.
52-week range: $35.05 (Feb. 23, 2009) - $100 (Aug. 21, 2008)
Dividend = $0.21 quarterly = 1.57% current yield
Schlumberger is a world leader in oilfield services with operations in 80 countries. 78% of 2008 revenues were derived from outside North America.
SLB saw huge sales and earnings gains during 2005 – 2008 as oil prices peaked. Zacks now expects earnings to fall from last year’s record of
$4.42 /share to about $2.61 /share this year. The obvious ‘bad news’ seems reflected in the price already with SLB shares down from 2007 – 2008 peaks of $114 and $112 to today’s $53.35 quote.
The dividend has been raised in each year since 2005 and now offers a 1.57% current yield- the best on SLB since 2003. It is well covered at a payout ratio of only 32% of the already reduced estimate.
Value Line assigns SLB an ‘A+’ financial strength and an ‘above average’ safety rating. These have never been ‘cheap’ shares with the 10-year median P/E at 31x. Even during 2008’s oil price peak (when you’d expect a cyclically low multiple) SLB commanded 18.5x earnings.
With oil prices now more likely to rise than fall, I think SLB will probably see both higher earnings and a higher multiple over the next few years.
Here’s a nice way to play Schlumberger out to January of 2011 that allows for a very nice total return with less risk than simply purchasing the shares outright.
.................................................Cash Outflow............ Cash Inflow
Buy 1000 SLB @$53.35 .................. $53,350
Sell 10 Jan. 2011 $55 Calls @$10.00 .............................. $10,000
Sell 10 Jan. 2011 $55 Puts @$11.90 .............................. $11,900
Net Cash out-of-Pocket .................. $31,450
If SLB shares climb by at least 3.1% to $55 by expiration date:
• The $55 calls will be exercised.
• You will sell your shares for $55,000.
• The $55 puts will expire worthless.
• You will likely have collected $1,260 in dividends.
• You will have no further option obligations.
• You will end up with no shares and $56,260 in cash.
That’s a best-case scenario total return of $24,810 / $31,450 = 78.8%
achieved on shares that only needed to rise by 3.1% or more.
Not a bad return on a somewhat conservative stock for a bit less
than 18 months.
What’s the risk?
If SLB shares stay below $55 through expiration date:
 The $55 calls will expire worthless.
 The $55 puts will be exercised.
 You will be forced to buy an additional 1000 SLB.
 You will need to lay out another $55,000 in cash.
 You will likely have collected $1,260 in dividends.
 You will have no further option obligations.
 You will end up with 2000 SLB and $1,260 in cash.
What’s the break-even point on the whole trade?
On the first 1000 shares it’s their $53.35 purchase price less
the $10 /share call premium = $43.35 /share.
On the ‘put’ shares it’s the $55 strike price less the
$11.90 /share put premium = $43.10 /share.
Your 2000 shares would have an average cost of $43.225 (excluding dividends) and $42.595 /share (including yield).
SLB shares could decline by up to $10.75 /share (-20%) from your original purchase price without causing a loss on this trade.
Disclosure: Author is long SLB shares and short SLB options.
