Over the past two business days we have heard from oil services giants Schlumberger (SLB) and Halliburton (HAL) . The results have not been outstanding in the least, even as the underlying commodity has rebounded almost exactly in the way that we had expected when we made the now well-know call to move in increased size into the large cap exploration and production names last December. That was a good call, but in truth only half the story. I had made, prior to that call in early 2018, an oil services call. That one backfired. Your pal got himself long both SLB and HAL on that call. The HAL long was short lived and was jettisoned at a loss. SLB was a more significant battle, one that required much finesse, one that without including dividend payments and the sale of options along the way meant to reduce net basis, would have also ended up as a loss.
The E&P names, BP (BP) , Exxon Mobil (XOM) , Royal Dutch Shell (RDS.A) , and now Chevron (CVX) (again), many of whom report later this week, have all proven worthy of their spot in the portfolio. Now that we have heard from the oil services leaders, do we even go there, again? Do we risk it?
On Monday morning, Halliburton went to the tape with a less than impressive $0.23 per share for the quarter that met consensus, on revenue that while flat year over year did rise above what had been expected. The stock moved higher in pre-opening trade despite what looks like very pedestrian performance, as crude prices took off upon the State Department's message on terminating waivers allowing certain nations to purchase Iranian oil. Oh, and CEO Jeff Miller's optimistic comments around earnings. Still, the shares sold off once the opening bell pealed it's last.
Though Miller believes that the "worst in pricing deterioration is now behind us", it is his counterpart at Schlumberger, Paal Kibsgaard, who remains the one with the accurate track record, and retains influence with investors in the space (at least this one). On Thursday, Kibsgaard mixed the good with the bad. Kibsgaard looks for North American exploration and production to decrease by 10% for 2019. That said, the firm sees investment in the space growing internationally by 7% to 8%, as rig counts rise. If this shift in exploration develops as Kibsgaard sees it, this makes for those willing to play the oil services game with Schlumberger the better long position going forward than Halliburton. Halliburton drives more revenue from the North American region than from the rest of the world combined. Meanwhile, Schlumberger, while still in need of domestic performance, enjoys a much better balance in revenue generation between North America, Europe & Africa, and the Middle East & Asia.
I don't trust this industry to perform right now. If one is interested in initiating exposure to oil services, I can see the case moving forward. For me, I would need to drop an exploration name as a means of avoiding over exposure to the sector. If an investor is to choose one name, for me it's SLB hands down over HAL. If the international diversity is not enough, SLB pays shareholders 4.39% just to stick around. Halliburton pays just 2.3%.
If one likes SLB, here's my idea...
- Purchase 100 shares of SLB at or close to the last sale of $45.29
- Sell one SLB June 21st $47.50 call (value: $0.87)
- Sell one SLB June 21st $45 put (value $1.87)
- Shareholders of record on June 5th will receive dividend payment of $0.50 on 12 July.
Note: Thanks to the sale of the covered call, the sale of the (hopefully) cash secured put, as well as the dividend payment, net basis for this 100 share long position drops to $42.05. Should the position be called away in June, the trader will realize a net profit of 12.9%. Worst case, the shares sell off hard, and another 100 shares are put to the trader at $45 in June. This would leave the trader long 200 shares at a net basis of $43.52, with the shares trading lower than that. At that point, the trader would immediately sell two covered calls to further reduce basis.
Note Two: This started out as a HAL piece. That's just not where the article took the author.
(Schlumberger and BP are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells SLB or BP? Learn more now.)