NEW DIRECTIONAL CALL PLAYS
Schlumberger Ltd. - SLB - close: 94.28 change: +1.62
Stop Loss: 91.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 8.75 million
Entry on April -- at $---.--
Listed on April 29, 2015
Time Frame: 8 to 12 weeks
New Positions: Yes, see below
Why We Like It:
It is finally time to buy energy stocks? It's starting to look that way. Crude oil prices were crushed with a -60% drop from June 2014 to January 2015. This has done significant damage to the oil industry in the U.S. and around the world. Companies have been trying to slash costs and shut down rigs. Yet crude oil production, especially in the U.S., has continued to climb.
U.S. oil inventories just rose for a record-breaking 16 weeks in a row. The good news is that the +1.9 million barrel build in inventory was less than expected. Inventories are at record highs and significantly above the five-year average. At the same time the number of active rigs has been plummeting.
Active rigs have dropped for a record 20 weeks in a row. The current total of active oil and gas rigs in the U.S. is 932. This is the lowest level since 2010. The number of active rigs peaked at 1,609 in October 2014 and this has been the fastest decline in history. We're quickly approaching the 2009 low of 866 active rigs.
Why do I bring up oil inventories and active rigs in the U.S.? Because eventually the trend on these two numbers will reverse. Sooner or later the oil inventory build will end and the number of active rigs will bottom. If trading in the oil service stocks is any indication then the market is banking on sooner instead of later.
The price of crude oil has already seen a +25% bounce off its March lows. We're starting to hear speculation that the action in crude over the last three months might be a bottom. There is also growing speculation that the decline in active rigs will reach a bottom in Q2 2015.
The stock market is always looking forward. It appears investors are looking past the current tough spot for oil producers and oil service companies. SLB is the world's largest oilfield services company.
According to the company, "Schlumberger is the world's leading supplier of technology, integrated project management and information solutions to customers working in the oil and gas industry worldwide. Employing approximately 115,000 people representing over 140 nationalities and working in more than 85 countries, Schlumberger provides the industry's widest range of products and services from exploration through production. Schlumberger Limited has principal offices in Paris, Houston, London and The Hague, and reported revenues of $48.58 billion in 2014."
There was a lot of focus on SLB's most recent earnings report. SLB delivered its Q1 results on April 16th. Wall Street was expecting earnings of $0.91 a share on revenues of $10.35 billion. SLB delivered $1.06 a share with revenues down -8.8% to $10.25 billion. The difference from Q4 to Q1 is dramatic. SLB saw a -19% drop in revenues from Q4 and a -29% drop in earnings.
SLB's Chairman and CEO Paal Kibsgaard commented on his company's Q1 results, "Schlumberger first-quarter revenue decreased 19% sequentially driven by the severe decline in North American land activity and associated pricing pressure. International operations were impacted by reduced customer spend in addition to seasonal effects in the Northern Hemisphere and the fall in value of the Russian ruble and the Venezuelan bolivar. Three-quarters of the overall sequential decline was due to lower activity and pricing, while the remainder was the result of currency effects and non-recurring year-end sales."
Kibsgaard continued, saying, "Despite the severity of the sequential revenue decline, we have been able to minimize its impact on our margins through prompt and proactive cost management as well as through acceleration of our transformation program across product lines and GeoMarkets. These actions have successfully improved financial performance compared to previous industry cycles... In spite of the detailed preparations we made in the fourth quarter, the abruptness of the fall in activity, particularly in North America, required us to take additional actions during the quarter. These included the difficult decision to make a further reduction in our workforce of 11,000 employees, leading to a total reduction of about 15% compared to the peak of the third quarter of 2014."
Kibsgaard provided his outlook on their business, "In this environment, we remain confident in our ability to grow market share, deliver superior performance in earnings per share compared to industry peers, and reduce working capital and capex intensity. Our favorable international leverage, our technological differentiation in North America, the acceleration of our transformation program and our unmatched execution capabilities continue to provide the foundations for our financial and technical outperformance."
Wall Street analysts were very optimistic on SLB. They applauded the company's fast response to cutting cost and reducing their workforce so quickly to changing market conditions. Analysts believe that SLB will be able to maintain strong margins compared to their peer group and that earnings will likely come in better than most expect. Analysts have also commented on how SLB is essentially the best in class for this industry and will take market share from weaker competitors. Several firms upgraded their price targets on SLB following the Q1 report and the new targets are: $100, $105, $107, and $110. The point & figure chart is more optimistic and is currently forecasting a rally to $122.00.
Shares of SLB spiked higher following its Q1 report but the rally failed at its simple 200-dma. Since then the stock has been consolidating sideways and building up steam for a bullish breakout higher. It looks like that breakout has started with today's display of relative strength (+1.7%) and a close above technical resistance at its 200-dma. The intraday high on April 17th was $94.89. We are suggesting a trigger to buy calls at $95.25.
Trigger @ $95.25
- Suggested Positions -
Buy the AUG $100 CALL (SLB150821C100) current ask $2.27
option price is a current quote and not a suggested entry price.
Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.
Option Format: symbol-year-month-day-call-strike