Schlumberger Stumble a Holiday Gift for Investors

 | Dec 18, 2012 | 9:00 AM EST  | Comments
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Most of our focus on year-end stocking stuffers has been on companies that have been navigating well through uncertainty and show significant promise in 2013. Today we focus on a great company which despite, or perhaps because of, a recent stumble should also be a stocking stuffer, as it, too, offers significant upside potential in 2013.

Schlumberger (SLB) ($69.68) is one of the great multi-national companies, widely regarded as the world's pre-eminent energy servicing company. On Friday, SLB announced that fourth quarter earnings would come in light by 5 cents a share to 7 cents a share as a result of delayed drilling activity in North America and select international operations.

While investors were expecting weak North American results because of low natural gas prices, the "contract delays" in several international markets that the company mentioned were not expected.

Since international results are the core to the company and represent 80% of revenue and earnings, and SLB was expected to be entering a multi-year period of recovery based on better international results, this downbeat announcement prompted a substantial sell-off.

A closer review however reveals that these so-called "contract delays" were primarily in Algeria and the North Sea, areas that while important are relatively less critical to the company. Moreover, the core and rapidly growing drilling projects, both on and offshore, in Saudi Arabia, West Africa, Brazil, Russia and Australia appear to be intact. We therefore believe that the earnings disappointment should be more transitory and non-recurring in nature.

Most importantly, the disappointment does not change our fundamental outlook for the company, nor our abiding conviction that SLB remains the best in class oil service player. It is uniquely positioned to benefit from an oil market where 2013 growth is expected to come from newly recovering international markets (rather than the U.S.), where SLB is the dominant force.

SLB's business has been in the rapidly growing international markets which are just beginning to recover. The company dominates the premium-end of the service markets with its industry leading wire-line and offshore drilling technologies units. On top of this, most of its North American business relates to the growing offshore oil drilling markets, as opposed to supply-glutted natural gas markets.

With still highly favorable oil prices, Schlumberger will be the key beneficiary of the next up-cycle in offshore drilling. Since 2005, more than 200 major offshore oilfields have been discovered by international energy firms.

Over the next five years, these fields will move from the discovery phase to the full development and production phase. In this critical and increasingly sophisticated implementation phase, SLB will likely be the pre-eminent 'go to' services contractor.

After lagging the market in 2012, we feel energy is poised for a rebound in 2013. And we think that oil field services will be a leader within the sector.

Based on 2013's earnings per share estimates of $4.90, Schlumberger is trading at only 14.2 times earnings, compared with its historical range of 17 to 19 times earnings.

We believe that Friday's sell-off should provide an attractive point of entry for powerful results in 2013. 

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