The energy stock that does it all
While the world waits for oil and gas demand to pick up, you can start exploring for profits with one versatile firm, says this U.S. advisory.
The price of oil (about $78 just now) may be telling us a lot of things.
But it is not telling us that demand for oil is surging ahead. And that goes double for natural gas.
There are many reasons to believe that demand must improve, a global economic recovery being chief among them.
But it’s not really happening yet. So should investors simply forget about energy stocks until the industry starts pumping away at full capacity again?
No, says one U.S. advisory. Now is the time to get in, before demand takes off.
And the best way to get a head start is with the company the other oil and gas firms call on when they want to get going again.
That would be the world’s biggest oil services firm, Schlumberger Limited (NYSE-SLB).
This massive company is already hard at work around the globe, says Louis Rukeyser’s Wall Street, but it will have a lot more work to do as the world starts calling for more energy.
Jack-of-all-trades
Mr. Peter Staas, writing for the advisory, informs us that two of “our favorite stockpickers” have gone to bat for Schlumberger.
Mr. Jerry Jordan, a prominent portfolio manager, “referred to the oilfield services titan as a $100 stock.” (This morning it is a $63 stock.)
The editor of The Energy Strategist, Mr. Elliott Gue (whom we have quoted a number of times in these pages), is also extolling its virtues.
But let’s start with a closer look at the company, which is a troubleshooter extraordinaire in the energy industry.
Two Alsatian brothers, Conrad and Marcel Schlumberger, founded the firm 82 years ago in France. They began by doing electrical measurement surveys. Within a few years the firm had logged its first electric resistivity test for an oil well, in California. By the 1930s, it was running many operations in the United States, and it is now headquartered in Houston.
It is a true jack-of-all-trades at the oil fields. The following is just a quick outline of what the company does: seismic acquisition and processing, formation evaluation, well testing and directional drilling, well cementing and stimulation, artificial lift, well completions and consulting, and software and information management. It is also active in the groundwater extraction and carbon capture and storage industries.
In short, Schlumberger does many things nobody else can do. And that gives it a big head start when things get rolling again.
The big slowdown
Thanks to lower commodity prices, oil and gas projects around the world have been postponed or cancelled, or the companies that service them have been asked to make concessions on costs. North America was particularly hard hit by this fall-off in activity.
In the face of this big slowdown, Schlumberger’s income from ongoing operations and its earnings are both down from a year ago.
But other oilfield services have fared worse, Mr. Staas points out. Schlumberger has a huge ace up its sleeve. It operates in over 80 countries, and 80 per cent of its total revenues come from foreign sources.
That means the company had “a degree of insulation against the precipitous decline in North American drilling activity.” It also aggressively cut costs, saving some $300 million in operations.
Drilling activity in Russia and East Asia appears to be picking up, but Schlumberger is being cautious. International margins won’t recover fully until new projects get under way. Earnings will still suffer this year.
Oil prices to the moon
Look ahead, and it’s another story, says Mr. Staas. “At present weak demand continues to drive oil prices, but once the global economy starts humming and energy consumption picks up, expect the lack of new expenditures on oil projects to send oil prices — and spending on oilfield exploration and production — to the moon.”
In a word, the very lack of activity over the past year and a half will lead to a remarkable flurry of activity once demand starts to rise.
Armed with its strong balance sheet, Schlumberger can hum along nicely while it waits for this to happen.
Mr. Staas points out that “Schlumberger’s expertise in a wide range of oilfield services should give it an edge in winning new contracts — especially as operators concentrate on hard-to-produce fields to offset waning production from mature onshore wells.”
The fact that much of the oil that will be needed in the years ahead must come from deep in the ocean and other remote locales is a very big advantage for this all-around troubleshooter.
The firm’s “comprehensive suite of services makes it a one-stop shop for larger operators looking for the convenience of dealing with a single company.” Schlumberger’s expertise doesn’t just get the job done — it helps to reduce costs and shorten project deadlines.
That’s one reason it just reeled in a big contract in Brazil, site of one of the greatest offshore discoveries of recent years.
It is a rule of thumb that when the demand for oil and gas rises, the first to benefit are the drilling and oilfield service firms. And one firm has more thumbs in more projects than anyone else, this advisory points out. Maybe that’s where investors should start drilling for profits.
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