In this type of market it pays to be a contrarian. And in the energy patch there’s no better choice for contrarians than Schlumberger Limited (NYSE: SLB).
Conrad Schlumberger started logging his oil field studies in 1911. He published those studies in 1920 and launched his company in Paris that same year. For the next three years, he and his partner (and brother) traveled the world undertaking geophysical surveys in key strategic nations like Canada, South Africa, Congo and the U.S.
The two brothers were building an industry that had never existed before, looking for geological characteristics that would help determine what resources were buried underneath their feet.
Unfortunately, Conrad died in 1936, before he could see the disruptive effect his business would lead. In 1940, the company switched its headquarters from Paris to Houston, likely because of World War II, as well as the fact that the U.S. had significant resource reserves and a stable economy.
Today, SLB is one of the world’s most influential and well-moated energy companies in the world. Any company with any size in the energy patch, has used one or many of SLB’s resources. If you’re drilling hole or are looking for a place to dig a hole for hydrocarbon resources, SLB is on the scene.
SLB Stock Is Using Its Size
Obviously, the past few years have not been kind to SLB. Like the rest of the industry, as exploration & production (E&P) dried up, so did the company’s revenue stream. But SLB is so well entrenched on so many projects around the world, it was just weathering a cyclical downtrend, as it has many times before.
As I mentioned, SLB has a huge moat that it has built largely with its standards of excellence and consistent quality. A moat is basically a competitive advantage that makes it hard for other businesses to compete for market share.
Another advantage SLB has is its size and its influence. So many major operations rely on one or many of SLB’s divisions that switching to another firm would be far more trouble than it’s worth. What’s more, its quality and consistency is highly valued in this high-stakes business. Going cheap is very risky option in the E&P sector.
Now U.S. drilling is coming back online quickly. President Donald Trump is all in favor of expanding U.S. production. And most important, demand is returning as the economy recovers.
Bottom Line on SLB Stock
It’s for these reasons that Schlumberger shares looks attractive again. Also, bear in mind that SLB stock is nearly 50% off its 2014 highs. Back then, those levels were not pricing in anything more than we’re seeing now in the energy patch.
On paper, the stock looks expensive and vulnerable. But it hasn’t grown to the size it is now, with the influence it maintains by not knowing how to weather tough times and rebound strongly.
Now is the time to take a stake, while herd is still sleeping.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.