Friday, July 27, 2012

SLB: King of the oil patch

Schlumberger Ltd. (SLB), the largest oilfield services company in the world, has broken above its previous swing high after it was upgraded to buy by Goldman Sachs.

SLB began its present uptrend from $60.17 on June 26 and hit a new trend high today of $73.47 (so far) with a two-day sharp thrust. Next resistance is at around $76, a high set in early May as the price worked its way downward.

Volume rose on the first day of the upward thrust, but peaked a lower level than the previous volume peak on July 20, a divergence that often bodes ill for continuation of the trend.

Long term, SLB has been in a downtrend since late July 2011, when it peaked at $95.53. It declined to $54.79 in October 2011, recovered to $80.78 in February this year, and then declined to a higher low and is now working its way up.

A break above the $81 level would put the longer term price movement into an uptrend from last autumn.

That's all in the midst of a years-long uptrend from the 2009 recession low.

SLB, then, is in an uptrend within a correction within a downtrend within an uptrend. This is not a stock on a clear path.

And that's not surprising. The Houston, Texas company makes its money in the oil patch, a place of great risks,  great profits and great volatility.

Oilfield services isn't what it used to be back in the day when my father was part owner of a small oilfield services company in Oklahoma. Used to be companies like Schlumberger, and Dad's company, came in and did the grunt work that was too unskilled for major oil companies' talents.

Nowadays, the majors have contracted out much of the work and more important, much of the technological innovation, that drives the industry. Schlumberger and its peers are on the cutting edge of the energy economy.

The Economist recently published an overview of the oilfield services industry that provides excellent perspective on majors utter dependence on these companies. You can read it here.

My takeaway is that the major oil companies like ExxonMobil may indeed be the rulers of the petroleum industry, but when it comes down to the nitty gritty of finding the stuff and getting it out of the ground, Schlumberger is king of the oil patch.

Whatever the risks, or perhaps because of them, analysts are super-enthusiastic about SLB. The enthusiasm index is 82%, up from 68% a month earlier.

Schlumberger reports return on equity of 17% with a very low level of long-term debt, amounting to 24% of equity.

Annual earnings dropped sharply in 2009 (like everyone's) and have risen in the two years that followed. Quarterly earnings have generally risen, although there have been some pullbacks. Nine of the last 12 quarters, including the most recent, have shown an upside earnings surprise, and three have surprised to the downside.

Institutions own 74% of shares. The price has risen so that it takes $2.27 in shares to control a dollar in sales.

SLB on average trades 8.4 million shares a day, as a wide selection of options strike prices and very narrow bid/ask spreads.

Implied volatility stands at 29% and falling. It is near the floor of the six-month range. Options are pricing in confidence that 68.2% of trades will fall between $67.10 and $79.26, for a maximum gain or loss of 8%.

Options are trading 32% above their five-day average volume, with calls having a seven percentage point edge over puts.

The stock is trading well above today's fair-price zone, which runs from $71.15 to $72.53 and encompasses 68.2% of trades surrounding the most-traded price, $72.04. The five-day fair-price zone extends from $67.40 to $70.23.

Schlumberger next publishes earnings on Oct. 18. The stock goes ex-dividend on Aug. 29 for a quarterly payout yielding 1.5% annualized.

Decision for my account: I'm wait-and-see on SLB. The lower volume of the last two days, compared to the previous week-long rise, suggests I would be wise to wait for a pullback before opening a position.

Also, I would want to play SLB as an options spread, and for that I want to get past the ex-dividend date.

Otherwise, I like the financials, while recognizing the risking nature of the energy sector. Those risks are a reason why I want a hedged position with options, rather than a simple bull position with shares.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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