Is my analysis correct?
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.