Wait for Lower Prices on Schlumberger

“Opportunity for all of you home gamers. Use the fear of chart readers to create the value in price that you need to buy Schlumberger at your price. We’ll catch it some other time. It’s not running away any time soon, not in this tough market.” — CNBC’s Mad Money 2/9/2010

Jim Cramer discussed the sector ETF for Oil Service companies OIH on his Off the Charts segment in which he looks at the security from a technical perspective. In short, he saw the OIH chart as bearish in general, and with the recent weakness in crude oil prices he told viewers to expect further declines to around the $103 level for support. If the ETF breaks that support, the chartists believe it may drop all the way down to the mid $80’s. However, he told his viewers why waste your time on a sector ETF when the best company in the sector may present a better opportunity.

Cramer’s advice for his viewers was to use the expected weakness for the sector to bring Schlumberger (SLB) down to a more attractive price level. Enough people follow the technicals that a chart as weak as OIH’s may become a self-fulfilling prophecy. He said he would use the fear among technical analysts to drive a great company like SLB stock lower making it a terrific buying opportunity. Among the reasons that he believes Schlumberger is a best of breed oil service company, many of its biggest clients are national oil companies, most of which are in the Middle East as one would expect. These state-controlled oil companies will continue to be relied upon for state revenue over the coming years to keep their main source of revenue as strong as possible. That means they really have no choice but to drill no matter what the price of oil; in other words, SLB’s business may prove to be more stable than their peers.

At the current price level, we have a Fairly Valued rating on SLB and from a fundamental analyst’s perspective, and we agree with Cramer that investors would be wise to wait for lower prices. For example, the current price-to-cash earnings is 12.5x, which is comfortably within the historically normal range over the last ten years of 8.9x to 16.8x. Similarly, we have calculated the historically normal price-to-sales range as 2.1x to 4.1x, with this current valuation metric sitting at 3.3x. Clearly, based on these two valuations the stock is neither cheap nor expensive for the current fundamentals. We would recommend investors begin to look more aggressively towards shares of SLB if it drops down into the low-$50’s. However, SLB has not been that low since last August, so barring a notable decline in the price of oil, it may not reach that level soon.

Cramer: Wait for Lower Prices on Schlumberger

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