Schlumberger a Buy for Patient Investors (SLB)

Schlumberger Limited (SLB) managed to beat Wall Street estimates despite tumbling oil prices last quarter, and that was enough for the market to applaud Friday, sending SLB up strongly in early trading.

Schlumberger logo slbThe early action in SLB stock points to just how pessimistic the market is when it comes oil services companies like Schlumberger. Revenue missed estimates, Schlumberger laid off 9,000 at the end of last year, and the company took more than $1 billion in charges for paring its workforce and write-downs for idle ships.

And yet … SLB stock rallied sharply.

Clearly the market was braced for worse. Given what’s happening with oil prices, the negativity is understandable. SLB helps oil producers drill and frack wells, but a global glut amid tepid demand has oil prices in free fall. A barrel of oil that topped $110 in June goes for less than $50 today.

And there’s no end in sight to this price pressure. Against that supply-demand imbalance, there’s little incentive for oil companies to drill and produce more oil. Schlumberger — like others in the industry, such as Baker Hughes Incomporated (BHI) and Halliburton Company (HAL) — is looking at one serious slump in the oil patch.

Indeed, on a global basis, exploration and production spending is projected to decline 17% this year to $571 billion, according to an estimate from Cowen & C0. In North America, the outlook is even worse. With the market already awash in U.S. and Canadian shale oil, spending on exploration and production is expected to drop 30% to 35%, Credit Suisse analysts estimate.

Not All Bad News for SLB

If there’s a sliver of a silver lining in those figures for SLB, it’s that it derives about two-thirds of its revenue from overseas. It was no small feat that for the most recent quarter, SLB managed to produce a 6.2% increase in revenue to $12.64 billion, which was in line with Street estimates.

As for the bottom line, it took a beating, but not as badly as analysts were modeling. Earnings fell to $302 million, or 23 cents per share, from $1.66 billion, or $1.26 per share, a year earlier. However, excluding one-time items for layoffs and write-downs, SLB earned $1.50 a share. That beat the Street forecast by 4 cents a share.

Yes, it’s ugly, but the market loves it when companies cut costs — even if it’s by getting rid of employees. In another boost for SLB stock, the company raised its dividend to 50 cents a share.

At any rate, the market is firmly behind Schlumberger in light of earnings. Shares popped more than 4% in early trades. Some analysts advise clients to buy SLB at current levels, given its overseas exposure, size, diversity and chance to pick up market share as smaller players go bust. Furthermore, the long-range forecast for oil demand remains very much in its favor.

After dumping 12% over the last 52 weeks — and 30% from its June high — SLB stock is a lot closer to the bottom than it is to the top, and the valuation remains fairly compelling.

Schlumberger remains vulnerable to another leg down in oil prices, but for patient investors, the stock does indeed look to be on sale.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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