Did Schlumberger Just Become A Buy?

This morning, in the first major energy sector release of this earnings season, oilfield services giant Schlumberger (SLB) reported fourth quarter 2017 results. Each quarter, their earnings are regarded as a bellwether for the sector, so deserve attention, but this quarter they also resulted in an opportunity in SLB itself.

The company issued a good report with in pretty much every way. They beat analysts' expectations on both revenue and earnings, and while they don't issue a formal guidance, they did indicate that their market conditions are improving. That should not come as a surprise to anyone who follows oil given that WTI is holding above $60 and Brent is doing even better. Of course, Schlumberger doesn't benefit directly from that, but they do so indirectly in two ways.

Firstly, it encourages oil producers to use some of the extra revenue they are seeing as a result of higher prices to at least begin to reinstate some of the cuts to capital expenditure that have been the theme of the last couple of years. Secondly, as that happens and demand for Schlumberger's services starts to creep up it restores pricing power to the service companies.

Still, despite all that, the stock took a hit when the numbers came out this morning. When I talk to retail traders and investors that pattern of a stock declining on good earnings is one of the things that they find both mystifying and frustrating, but there is always a reason. Sometimes, as in the case of IBM (IBM), who also reported this morning, it is in the details of the report. Big Blue beat on the headline top and bottom line, but did so with declining margins and offered 2018 guidance that fell short of expectations. That was not the case with SLB, though, so what gives?

Most of the time when this happens, as I have pointed out here before, it is really nothing to do with the numbers, but is all about market dynamics, and that is the case with Schlumberger. The recent surge in oil prices could not possibly influence last quarter's results, but it led to a concurrent surge in optimism about the oil industry, and traders bid the stock up as result, as you can see from the chart below.

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As that took place, so the so called "whisper number", the unofficial expectations of traders rather than analysts, climbed to where even a good quarter was seen as a disappointment. Add in the "buy the rumor, sell the fact" effect of fast money coming in in anticipation of a blockbuster and an initial drop on a good report makes sense. That does not however mean that the stock is headed lower from here.

The fundamental conditions that caused the run-up in the first place still apply, and as they play out over the coming weeks and months further gains are on the cards. WTI and Brent are both holding at their new, much higher levels, and talk of expanding capital expenditure is coming from producers. If that is finalized when the big, integrated, multinational firms begin reporting earnings and issuing earnings over the next few weeks it will give SLB and other oilfield service companies a big boost.

My advice then is to treat this morning's drop in SLB as an opportunity. It may pay to wait and see the result of Washington's annual brinkmanship with regard to a shutdown, but buying at some point in the near future looks like a good bet for investors.