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.