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Is my analysis correct?

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February 28, 2012 – Comments (4)

For some reason I have had trouble understanding oil exploration companies.  I do not know much about the oil industry, and I always figured that there was a lot of big players involved, meaning I should ignore it and stick to my circle of competency.  However, with SLB there appears to be a few factors that jump right out to me, which make me think it is undervalued. 

Please, feel free to tear apart my analysis.  tell me why I am right and why I am wrong on certain things.

1) Oil levels are sustainable.  Last year when oil prices were this high I remember OPEC and XOM's CEO saying that the price of oil was too high.  This time around there is no chatter like that, making me think it is not overvalued.  Also, people are complaining less about it this time around from personal experience, making me think people can afford it, especially since the economy is picking up.

2) SLB was about 21% higher last time oil was at these levels.  Gas prices are lower but SLB does a lot more oil drilling than gas drilling, and gas prices seem to be stabilizing.  This could mean SLB was overvalued last time, and it could mean I am wrong on gas, but it could mean SLB is cheap.

3) SLB is expecting 32% earnings growth, 12% revenue growth in the next few years.  At a p/e of 15, this is too cheap.

4) SLB is the best oil and gas exploration business in the world. Do I understand the technology, or why they are the best?  Not even close.  But I hear everybody who knows anything about oil praise SLB as the best management and technology and they seem to have the most consistent earnings.  Good enough for me.

5) This is what I am most unsure of, as it is just a guess.  I would think that volatile oil prices would help SLB a lot, because a quick climb in oil prices would make wild cat driller increase demand for SLB services very rapidly, meaning the growth is not even considered yet because it is not a gradual increase, it is something that will ramp up like crazy in the coming year. 

All of these factors lead me to believe SLB is worth around $95.  Plus it is hiking its dividend.

 

Now please, tell me where I am wrong and where I am right.

4 Comments – Post Your Own

#1) On February 28, 2012 at 12:36 PM, Mega (99.96) wrote:

I am not sure item 4 is correct.  Atwood Oceanics (ATW), Halliburton (HAL) and a few other companies in the oil services sector have higher 5 year average ROIC and 5 year earnings growth than Shlumberger.  Some of the metrics I use when judging quality.

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#2) On February 28, 2012 at 1:03 PM, awallejr (83.92) wrote:

SLB is an oilfield services company, it is not an oil and gas exploration company.  It is, however, considered to be a leader in its field.  With a long term horizon, and discounting any future black swan events, this stock could literally double within the next 3-5 years.

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#3) On February 28, 2012 at 8:40 PM, JakilaTheHun (99.94) wrote:

Whether oil is "overvalued" presently is debatable, but my view is that oil prices are going to consistently fall over the next decade, as new technological processes and abundant supply in the US and Canada beat down prices; similiar to how natural gas prices have been falling.

At the same time, most of the oil service stocks seem to be selling at more conservative multiples this time around, so perhaps the market is anticipating downward pressures on oil prices.  I've actually looked for short plays and haven't been very successful, as most of the companies I look at seem to be selling as if the long-term price of oil will be closer to $90 / barrel rather than current prices.

So I guess I would say that I think most of these companies look about fairly valued right now, when you consider the prospect of falling oil prices in the future, coupled with low P/E multiples. 

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#4) On February 29, 2012 at 4:38 AM, Valyooo (99.45) wrote:

Jakila,

I have always found that after a huge run up in the price of a commodity / sector, it is always safest to short the crap ETFs, especially leveraged ones.  Oil and gas ETFs suck enough on their own; add in rebalancing and they are garbage.  Even if oil gains 10% more this year, you are probably not going to lose any money shorting UCO.  Why short companies paying a dividend, and expanding their revenue over time as the business grows, rather than just shorting the vehicle which already sucks?

When oil prices are getting crushed it is too risky...a sudden pop will wipe you out. With the RSI of UCO being 63, why not initiate a a small UCO short?  Let gravity do its things, take the easy way out.

Plus, there is no surprise like "company XYZ just got a huge contract" to send the price up a ton.  If you short OIH, you are shorting some good companies.  Being direct (shorting oil itself) will give you the least chance of being surprised, as long as your thesis stands correct.

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