Schlumberger - The NEW Belle of the Ball?

Jim Cramer is saying that Schlumberger (SLB) is de-risked.  It's hard to argue with that logic.  After all, SLB gave an abysmal earnings report, stated that supply is weakening as the dramatic cuts in E&P investments are STARTING to take effect., stated that revenue is dropping due to persistent pricing pressure, and on and on and on.  The company through all this managed to still turn a healthy profit and beat analyst estimates by one cent, but the revenue trend is not doing well (no pun intended).

The overall O&G market is plagued by a glut in supply, and an ever-decreasing capacity for storage.  This earnings season is showing an overall trend toward a slowing economy and that means FEWER truck on the roads, both here an abroad as international companies are getting hit harder.  Fewer trucks on the road means less demand for diesel.  Less demand for oil and a glut of supply spells trouble for oil producers.  The heavily leveraged companies like Sandridge (SD) or Magnum Hunter (MHR) are likely in deep trouble.

I even pointed out the long-term Head-and-Shoulders pattern I see in the 10-year chart.  Over the last 3 years SLB and other oil companies like Halliburton (HAL) have formed this same pattern:

The Head and Shoulders in the OIH was considerably more abbreviated in time:

This, I'm sure, has a lot to do with the many sectors and components to this index fund.  Natural gas, pipelines, tankers, producers, explorers, and others all make up this fund.  So it should be no surprise that this fund may very well be finding a bottom as industry focus shifts from one sub-sector to another.

With all this going for it (sic), SLB share price barely flinched and even seemed to rally on Monday after HAL reported similar dismal revenue numbers.    I have to wonder, though, how far those revenues can erode before dividends get reduced or altogether cut.

Yesterday at the close of trading, we learned that SLB has LEASED the exclusive rights to a fracking technology from Energy Recovery (ERII) for the next 15 years which sent ERII shares soaring over 100% in after-hours trading.  No doubt this is a short squeeze as the last reported Short interest in ERII was more than 3.5M shares, representing 35 days to cover at their A.D.V.

For SLB, this means that there is a near-term cash outflow over the next year of $125M JUST for the rights to use this technology.  SLB STILL has to actually invest in the execution of the technology and that will likely be far more than the licensing costs.  That plus the costs of the CAM merger, means that SLB's CEO was not kidding when he said that the next TWO YEARS were going to be rough.  SLB's CEO is taking a huge risk investing so much into fracking when natural gas is selling at its current prices.  I'm a little surprised that he isn't going after pipeline exposure as a glut of natural gas will not effect the pipeline revenues as much as it will for producers.  He might be better off making a play to buy up Magnum Hunter (MHR) as part of a restructuring of that company.

Anyway, with a forecast as ugly as SLB's I suppose it's just Wall Street logic that the prices should finally rebound.  I wouldn't my breath for a dividend after December, though; at least not for the next 2 years.

Schlumberger & Halliburton, A Double Tap to Oil & Gas?

     Tweets just don't give enough characters for an intelligent one-liner, let alone a detailed review of a topic like the 2015 Q3 earnings for Schlumberger (SLB) and Halliburton (HAL).  These are admittedly two well-run companies (no pun intended) in the Oil & Gas sector, but are suffering from the decline in commodity prices of the products they service.  Thursday, after market close, SLB posted financial numbers indicating that they beat by one cent per share on earnings, but missed on revenue.  This is definitely a testament to the quality of the management at SLB because they suffered greatly on revenue, but still managed to keep costs down to a level where they beat the estimates, if only by one cent per share, but ALSO managed to maintain a share buyback program as maximum allowable amounts, lowered long term debt, and negotiated an acquisition of another company to compliment their own corporate offerings long into the future (Cameron International - CAM).

    With all this going for SLB, what could possibly go wrong?  Well, for starters, in that same set of numbers, and confirmed by the phone conference Friday morning, SLB is lowering guidance well into the future.  They will have to, by law, stop their share buy-back until after the CAM shareholder vote; currently the next annual meeting is May 6 of 2016, so saying that the merger will be completed in Q1 of 2016 when the next scheduled vote is in Q2 of 2016 seems odd.  Clearly, there will need to be a hasty shareholder meeting put together if SLB's timeline is to be kept.

    Where SLB is concerned, their report and their history shows a progressive decline in revenue.  That sits at the heart of their problems right now.  HAL is due to report Monday morning, releasing numbers at 7:30 AM EDST and their conference call is at 8:30 AM EDST.  Analysts have already cut expectations for Oil & Gas companies based on the depressed prices for the commodity.  SLB managed to beat on earnings via a skilled use of cost control, but their revenues were a miss.  If HAL reports a similar miss on revenue and a similar dark outlook for O&G services then the entire sector will likely take a hit in the near term.  If HAL manages to beat on revenue then it will say a lot about SLB's report.  If SLB is reporting deteriorating revenue and HAL is improving or at least not deteriorating then we will likely know where SLB's revenue has gone...   From AMD to INTC.  

That's right, I'm saying it.  If HAL beats on revenues after the report and guidance we got from SLB on Friday then it likely means that SLB is losing market share.  Let me be clear in stating that I do not expect this, but we won't know HAL's numbers until they are published.  If HAL shows similar numbers both top and bottom line but has a more optimistic outlook, then it's probably just optimism.  Whether that optimism is well placed, only the passage of time and proven results, or the lack thereof, will be able to tell us.

From a chart perspective, I see HAL looking a bit bearish:

The Fibonacci retract in the downward direction seems to be consistent with a reversal from the long term bullish trend HAL has enjoyed for the last few years.  Further, there is the look of a possible Head and Shoulders pattern in that monthly chart.  The knowledge of a glut of oil and increasing reports of well shut downs and cutbacks, only further supports the notion of this being a bearish pattern worthy of careful consideration.  If you're long this stock, or any other on the O&G services sector, then I recommend either taking some profits or hedging with some Put options to cover your position.

When I look at the 10 year monthly chart for SLB:

I definitely see the Head and Shoulders pattern, but I also see that the retrace on the run-up from early 2009 has hit the 63% marker, and is currently a little over it.  If it breaks below this, then the H&S will be confirmed and SLB will likely see mid to low $50's before it's over.

If we look at the near term chart for CAM, the company being acquired by SLB we might get a feel for what is being anticipated by the share holders there.

    This seemingly bullish consolidation looks pretty good except for the hanging man candle from Friday.  High volume, but no movement and the price is at a peak.  This means that someone, or several, are selling at a pace that is overcoming the growth in price for this stock.  As a company, they seem well managed, feel free to review any of the analysts' reports on CAM, but to me, they look like a healthy company with a stock about to get a temporary knock-down.  The gap-up from the news of the buy-out will likely need to be covered in a retrace before this stock moves much higher.  I'd say wait for a better price to get in, or cover with Puts if you own it and don't want to give it up.

This is going to be a busy week for earnings reports, and HAL is either going to provide a little lift to the O&G sector (but at the demise of SLB's share price), or the entire sector is about to start off this coming week with a double tap to the Head & Shoulders.