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Schlumberger Has Fans Gushing

Analysts like the oil services giant amid a period of persistently high energy prices.

Oilfield services companies are striking it rich.


BJ Services


, which already topped Wall Street estimates this week, industry majors


(HAL) - Get Halliburton Company (HAL) Report



(SLB) - Get Schlumberger NV Report

are set to report gushing quarterly profits when they release earnings on Friday.

Granted, Halliburton warned last month that special charges will whack away at its bottom line. But the controversial company -- long weighed down by asbestos litigation and its ties to Vice President Dick Cheney -- is still expected to post strong operating profits as the entire industry capitalizes on high energy prices.

BJ Services managed to grow operating profits by 45%, and beat the consensus estimate by 4 cents, when reporting quarterly earnings on Wednesday. Analysts now expect Halliburton to post second-quarter earnings of 33 cents a share -- up from just 6 cents a year ago -- due to strength in its oil services division. They are looking for Schlumberger's second-quarter profits to come in at 49 cents, up 53%.

Bob Howard, author of the investment newsletter

Positive Patterns

, is in the camp that dislikes Halliburton because of its asbestos exposure and other problems associated the Kellogg Brown & Root unit that keeps winning contracts in Iraq. He has been recommending that his clients load up on Schlumberger at current -- and even higher -- prices instead.

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"Wall Street has been consistently wrong about energy prices for two years now," said Howard, who doesn't personally invest in the stocks he covers. "Since the Street is behind the curve on the energy buildout, Schlumberger should consistently outperform earnings estimates ahead."

Howard considers Schlumberger the "big boy" in the drilling business and the very best at what it does. He looks for the company's stock, down 55 cents to $63.60 Thursday morning, to double over the next year.

Lean and Mean

Prudential analyst Grant Borbridge finds plenty to like about Schlumberger as well. Following the company's analyst day last month, Borbridge expressed faith in Schlumberger's ability to keep turning the business around.

"For the most part, we share the view of SLB management that the fundamentals for oil service companies are very strong for the next number of years," Borbridge wrote. "The company set new benchmarks and goals that it will strive to achieve over the next few years, and given management's regained focus on being the premier oilfield services company, at this point we like their chances of success."

Schlumberger plans to grow its business through geographical expansion, technological improvements and integrated project management contracts. In the meantime, Borbridge says, Schlumberger has already hit its debt reduction goals -- thanks to proceeds from recent asset sales -- and now has enough excess cash to increase its share repurchases. However, Borbridge is somewhat disappointed that the company has no plans to share more of its cash with investors by increasing its quarterly dividend.

Borbridge also stops short of recommending Schlumberger's stock. He believes the company's profit growth is already reflected in the shares, which he values below the current price even after raising his target on Thursday.

Borbridge is, in fact, somewhat cautious on oil services companies and energy prices in general. He believes that oil services stocks are driven by energy prices that, while unpredictable, could be headed for a major correction. Still, he also feels that the industry could fare well even if energy prices fall to lower levels.

"Although we are concerned about the impact of a correction to commodity prices," wrote Borbridge, who has a neutral rating on the industry, "the current prolonged period of high commodity prices has led to significant balance sheet improvements for the major and independent

exploration and production companies, which would enable those companies to increase spending further if they choose."

Cash Cows

In an even stronger statement, Morningstar analyst Mark Weber echoed that belief.

"Oil and gas production companies have accumulated a lot of cash, thanks to high commodity prices," Weber wrote this month. "And we're confident that much of that money will find its way to oil services firms over the next few years."

Thus, Weber fully expects the industry to keep performing well. But he wouldn't buy headline-prone Halliburton for even less than half its current price. He acknowledges that the company's oil services division -- trailing only Schlumberger's in size -- has become "quietly successful." He also believes that a multibillion-dollar asbestos settlement will soon put the company's biggest challenge behind it.

But he points to Halliburton's controversial KBR unit as an ongoing drain on the company. KBR has delivered nearly all of Halliburton's revenue growth with its huge contracts in Iraq. But Weber views such business as unsustainable and, in the meantime, barely profitable at all.

"KBR is involved in several big projects around the world, although none of them create value for shareholders," Weber wrote. Moreover, "KBR's Iraq business has brought headaches and controversy and has added nothing to the firm's bottom line."

Several analysts who view Halliburton more favorably expect the company to shed KBR after the asbestos settlement ends the division's huge exposure. But for now, the unit keeps encountering setbacks even outside Iraq.

Namely, KBR is causing Halliburton to take a big quarterly charge -- once again -- due to problems with a huge project in Brazil. Gimme Credit analyst Carol Levenson last month pointed out that Halliburton has now taken $752 million worth of charges related to the project. And she is not one to dismiss such big numbers.

"This charge, too, will have cash consequences, and we're not at all certain this will be the last charge for this project," Levenson wrote. "We strongly resist the urge to ignore or set aside these project overruns when calculating earnings and margins, not only because they're recurring but also because managing construction projects is KBR's primary business, and this really can't be considered a 'special item.'"

Levenson was looking for Halliburton's negative cash flow generation to continue even before news of the latest charges. Now she is worried about the charges' impact on Halliburton's rising debt ratio and points to "some crucial liquidity maneuvers" ahead. She is, therefore, warning investors away from the company.

"Halliburton's legendary financial strength," she declared, "has diminished markedly."

Shares of Halliburton slipped 7 cents to $30.88 Thursday.