Shares of the Texas-based Schlumberger Limited (SLB) have been down approximately 13% since June this year. Given our continued positive view of the group’s underlying fundamentals, we view this pullback as an attractive entry point in a leading oilfield services name.
We particularly like Schlumberger for its strong international footprint, particularly in the Eastern Hemisphere. The company remains better positioned in the current environment of tentative outlook for the North American market, given its low exposure to this region.
Given the scope of its geographical footprint, Schlumberger enjoys strong leverage to the current oilfield cycle. While activity levels in North America, particularly in the onshore markets, have reached peak cycle levels, most of the other global markets still lag far behind.
We think that this plays up to Schlumberger’s strengths, given its strong international presence and long-standing relationships with national oil companies, market leadership position and a track record of technological innovation.
We think that international pricing will follow the North American lead, which should help sustain Schlumberger’s margin-improvement trend. In particular, the company’s strong presence in the Eastern Hemisphere is expected to be significant to its earnings growth momentum going forward. And with approximately 35 newbuild offshore rigs expected to enter the market later this year, with more expected next year, the outlook remains robust.
With about three-fourths of its revenue coming from markets outside North America, Schlumberger is better positioned than its large-cap peers in major international markets. Major growth areas include West and South Africa, Nigeria, Algeria, Libya, Saudi Arabia, Qatar, India and China. With continued growth in activity levels, pricing power has significantly improved in these markets.
This is helping Schlumberger post solid margin gains, resulting from strong demand for its technologies and services. We expect this trend to continue in the upcoming quarters as well.
As such, we believe that the oil services behemoth offers considerable upside from current levels. We therefore maintain our Buy recommendation ahead of the company’s second quarter results, expected on July 24. Baker Hughes, Inc. (BHI) is our other Buy-rated large-cap diversified oilfield service name.
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