2 Stocks To Consider As Oil Nears $15

Last week, I wrote here that while I was not in the “WTI to $10” camp of doom and gloom for energy, I could see short-term dynamics pushing crude to the mid-to-upper-teens before some sort of recovery took hold. This morning, near dated WTI futures (the May 2020 CLK20 contract) dropped to a low of $17.31 before bouncing to just above $18. So far, so good, and with the June contract (CLM20) trading above $25, it seems that the market agrees that a significant recovery is coming before too long

I also said last week that if that was the case, investors should e considering what to buy when WTI got into the teens, so now is a good time to explore some options.

The topical pick, and one that makes sense in a lot of ways, is Schlumberger (SLB).

The oilfield services company has been hit hard as oil has declined, dropping from above $75 just a couple of years ago to under $15. That is understandable given that the response to that of most energy companies has been massive cuts to capex but when SLB released Q1 2020 results this morning, there were some positives among the bad news.

Bad news first....

On an adjusted basis, earnings were basically as expected at $0.25 per share, but that was after a massive pre-tax goodwill charge of $8.5 billion. Before that adjustment, SLB lost $5.32 a share. They also cut the dividend by 75% and made big cuts in staffing. So, given all that, what can possibly be good?

Well, the main thing is that even through all that, Schlumberger managed to maintain a positive operating cash flow of $784 million and levered free cash flow of $179 million.

There was other good news too.

A while back, as U.S. shale production started to look like it was peaking, SLB’s management announced a shift in focus back toward international operations. That seems with hindsight to have been a good decision, as even as everything crashed in Q1, they posted a 2% year on year gain in international revenue.

That is why, despite all the bad news and the big drop in crude this morning, SLB is effectively unchanged in early trading. If it can do that in those circumstances, it bodes well for the stock’s performance when the bounce back comes.

Another stock that is exhibiting strength this morning despite all the bad news is EOG Resources (EOG). As I write, EOG is up over 9% in early Friday trading, although for reasons quite different from SLB.

It is possible that the effects of the coronavirus shutdown and the price war that reached a head last month will be long-lasting, but it looks unlikely right now. The price war is already over, with a hasty kiss and make up between the Saudis and Russians once it became clear that the cost of their tiff was so massive, and there is an end in sight to the pandemic. On that basis and with crude at the level I was looking for, it is time to start buying. SLB and EOG are a good start.

EOG’s strength is largely to do with a bump in natural gas prices this morning, as that accounts for just over half the company’s reserves and revenues. That is great, but oil is still important to them, so imagine where the stock could go over the next couple of months if natural gas just holds up and crude does hit the June contract mark of around $25…