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An Unlikely Entry Point For Some Long Plays

Last week, as earnings season began, I suggested a few plays that, at the time looked a little risky. I mentioned four stocks as possibilities, Halcyon (HK), Exco (XCO), Continental (CLR) and Devon (DVN). The first two looked viable on the basis that all of the bad news about earnings was priced in, and the others were a play on the possibility of acquisition rumors. The takeover scenario hasn’t played out yet, but a reaction to slightly higher oil and some early “not as bad as it could have been” Q1 earnings in the energy sector have given all four a boost. They are all trading higher (between 3.5 and 13 percent higher) than Friday’s close.

So far, so good, but if those plays were a little too risky for your taste there may be a couple of trades in front of next week’s earnings releases that pose a little less risk. For that, rather than looking at extremely hard hit E&P companies, it may be better to look at oilfield services companies. They too have been under pressure as the E&P companies have shelved projects, but they have not hesitated to take action that has been welcomed by the market.

Big job cuts and other cost cutting measures have already been announced by almost all service companies. That may make it seem like a strange time to buy the stock going into earnings, but we are way past the point where shrinking capacity is a negative. For evidence, think about what happened to Schlumberger (SLB) stock on Thursday after the market close.

SLB released results that will set the pattern for oilfield service companies over the next couple of weeks. They missed expectations for revenue, but beat on the bottom line. At the same time they announced another 11,000 job cuts on top of the 9,000 already announced, taking the total to around 15 percent of the workforce, and lowered guidance for next year. Normally that combination would cause any stock to tank. SLB was up over 2 percent in aftermarket trading.

There is just so much bad news baked into both the estimates for anybody associated with energy, and the price of their stock, that any glimmer of good news will prompt buying. Less business, shrinking the company, and downgrading guidance were ignored in the case of SLB. A beat of drastically lowered estimates was enough to support the stock. I have said it many times and will say it again... Take it from somebody with 20 years of dealing room experience, market dynamics and positioning…




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