Schlumberger Limited. (NYSE:SLB) has been in the energy patch since the early 1900’s, so it has seen a few ups and downs in this highly dynamic sector.

The energy sector is a domestic and global economic bellwether — when times are good, energy consumption grows, and when times are bad, energy consumption slows.

Given its position in the global energy market, SLB stock sees this ebb and flow in the fact that wells slow production or shut down and exploration slows or stops when economic times are tough.

And they have been tough recently.

What’s Happening With Schlumberger Stock?

First, the Saudis moved to increase their supply in the markets a few years ago to lower prices to hurt the booming U.S. drillers. In mid-2014, before the Saudis dropped the hammer, SLB stock was trading at 117. Today it trades in the mid-60s.

After the OPEC production boost passed, there were economic challenges that kept energy prices low, even when U.S. drillers were back at work.

As with most markets, steady is much better than unpredictable. And the energy patch has been unpredictable since the market crash in 2008. This has affected Schlumberger stock because a large portions of its customers are exploration and production companies. If they aren’t drilling or exploring, or aren’t confident that their efforts won’t yield revenue, they’re not buying equipment and services.

This explains why SLB stock is off 17% year-to-date. But so far, this story is about how we got here. The real question is, where is the stock going?

And that answer is — higher.

Already, Schlumberger stock is up 9% in the past month after it beat expectations on its Q2 earnings. And analysts are expecting a sizable jump in Q3 earnings as well. Rising earnings are very bullish for stocks, especially stocks that are built around an industry’s revival. Because once an industry — especially one as fundamental as energy — starts a comeback, it usually overshoots expectations to the upside.

Bottom Line on SLB Stock

The major hurricanes that hit Texas and Florida and the Caribbean have wreaked havoc that will be felt for a while. But the immediate impact for many has been higher gas prices since Texas refineries and offshore drilling rigs went offline during the storms and limited supplies to the East Coast.

Those facilities are back online now, yet energy prices are still high. That’s a good thing for domestic drillers, since higher prices help grow their profits. When OPEC tried to shut U.S. drillers down, most U.S. drillers could only be profitable when oil was around $50 a barrel.

After OPEC shut many drillers down in 2014 because of this, the surviving drillers came back much more competitive and can now drill profitably into the mid- to low-40s, which is where oil has been for a while now. And even after we get back to “normal,” they will be able to drill profitably and at lower levels.

That means SLB stock will be reaping those rewards. And its 2.9% dividend is a nice down payment on your patience while the turnaround starts in earnest.

— Richard Band


Source: Investor Place