This morning, oilfield services giant Schlumberger (SLB) announced results for Q2 2017. SLB has dropped around twenty-five percent since the beginning of the year as the effects of the capex cuts by oil companies following crude’s collapse started to bite, and this morning’s numbers looked on the surface like more of the same. Read a little deeper, however, and there is good reason for optimism. That, combined with the type of technical setup that regular readers will know I favor, convinces me that SLB is a great buy at these levels for short and long-term investors alike.
First, the bad news. Schlumberger once again posted a net loss for the quarter, this time of $74 million, or 5 cents per share. That sounds bad, but compared to the $2.16 billion loss in the same quarter of 2016 it is a spectacular result. Adjusted earnings were positive, showing a profit of $0.35 per share on revenue of $7.46 billion, both of which beat expectations handily. That has caused the stock to trade a little higher early this morning, but when you look at the 1 year chart below it is obvious that move won’t put a dent in the recent declines.
However, what traders and investors should bear in mind here is that oil companies’ capex spending tends to change course a little like an aircraft carrier. Most firms learned a long time ago that reacting too quickly to fluctuations in the volatile oil markets is a bad idea: it creates confusion and ultimately ends up costing money. That is why capex levels generally remained quite high as crude dropped from over $100 a barrel to under $50 and were only really reduced significantly last year after the low of under $30 made it clear that there would be no rapid retracement.
It is now becoming increasingly likely that the resultant drop in exploration will, at some point, prove to be a problem as global demand for oil continues to grow. The massive year on year improvement in Schlumberger’s numbers indicate that the big, integrated oil companies, whose plans are measured in decades rather than years, are beginning to edge spending back up. The competitive nature of oil E&P ensures that others will follow suit. The giant ship of oil capex is changing course, and SLB, after cutting costs for a leaner business, is placed to benefit enormously.
The fundamental case is strong, but, as a trader, I am always aware that even the most logical argument can be wrong. The old adage that the market can stay illogical longer than you can stay solvent should always be born in mind, so having an exit strategy in place is always essential. That is where the technical setup in SLB comes in as it provides a logical level for a stop-loss order that would keep losses manageable.
SLB has staged a gradual, mini recovery since hitting its 52-week low of $64.15 a couple of weeks ago, as you can see on the chart. It is reasonable to assume that support will emerge somewhere around that low, so setting a stop just below it, at around $63 would make sense and limit potential losses to less than seven percent of your investment. That looks like a reasonable risk to assume on a trade that offers a potential return of thirty percent or more. That is why despite an unspectacular quarter for Schlumberger and yet another losing quarter this morning is a great time to buy the stock.