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Why Schlumberger Deserves a Closer Look


Shares of the oil-service company look cheap.

With many wondering if the market is going to run out of steam soon, it may be time to look for some names that have underperformed in their sectors.

With the price of oil on the rise, one name that deserves a closer look is Schlumberger (SLB). The leading oil field service and seismic company, Schlumberger does business in almost all major oilfield sectors including: North Sea, Middle East, Latin America, Russia, and Nigeria.

This morning, Citigroup analyst Robin Shoemaker reiterated his Buy rating on the stock as the analyst feels the market has undervalued Schlumberger compared to its peers. Shoemaker notes the Oil Service Index (OSX) is up 65% so far this year while Schlumberger is only up 54%.

Moreover, Schlumberger historically has sold at a higher PE multiple than its peers, including Baker Hughes (BHI), Halliburton (HAL), and BJ Services (BJS), but it currently sells below the median multiple of 25 times earnings. "Investors have favored the North America-leveraged companies on the view that depressed natural gas will recover eventually, bringing the severe downturn in natural gas drilling to an abrupt end," Shoemaker wrote.

Citigroup believes that Schlumberger has a new market opportunity -- one that took years to accomplish -- in deepwater drilling rigs, as 33 new rigs will be delivered and ready for operation from shipyards in 2010. On these rigs, Schlumberger will sell wireline logging services, directional drilling services, measurement while drilling, drilling fluids, and cementing.

Potential profits from this new market aren't yet built into next year's estimates. "We cannot presently calculate the average revenues SLB will generate from each new ultra-deepwater rig, but it will be substantial, with an even greater bottom line impact due to the high margin nature of these products and services," the analyst's note said.

Citigroup forecasts the company will earn $2.80 per share next year, $3.50 in 2011. However, with oil at $80 per barrel and the deepwater rig project not being calculated, these estimates may prove to be conservative. Shoemaker placed a price target of $80 per share based on a multiple of 23.5 times his 2010 EPS estimates. Citigroup's estimates seem to be in line with the rest of the street as just last week, Credit Suisse raised its 2010 and 2011 EPS forecast to $2.80 and $3.15 and its price target to $72.

Schlumberger does come with some risks. For instance, if the price of crude oil falls, it could negatively impact its stock price. Also, the company does business in very risky areas where geopolitical and economic tensions are high. As with every company, competition could be a concern as companies enter markets that Schlumberger has typically dominated.

Risks aside, Schlumberger could make a good long term investment as shares are historically cheap, EPS momentum is strong, and the prospects for new lines of business are favorable.

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No positions in stocks mentioned.

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