It's been a long, drawn-out down cycle in the energy services sector.
With WTI crude oil prices failing to stay above the $70-per barrel mark for more than a couple of months over the past five years, even the best-performing companies in the space have failed to draw much demand for their stocks. This seems to have been the case of Schlumberger (SLB - Get Report) , the largest and most geographically diversified among the key players in its industry.
The company has arguably done all that it could to protect its margins and earnings from decreased demand for oilfield services since 2014. Despite the highly unfavorable environment, Schlumberger still managed to prevent EPS from dropping any lower than 20 cents in any given quarter -- while even its most able competitors, including Halliburton (HAL - Get Report) , have been unable to keep net earnings in positive territory at all times.
Yet, shares of Schlumberger continue to head lower, in a generally bearish trend punctuated by "head fake" rallies that eventually prove short-lived.
Introducing: Heightened Geopolitical Risks
But on Saturday, Sept. 14, Saudi Arabia's oil industry fell victim to an unprecedented attack on the world's main crude processing facilities that led the country, the second largest oil-producing country on the globe, to cut its production in half. On Monday, WTI crude oil prices traded as high as 15% above Friday's levels, the steepest daily increase since December 2008.
Given the supply disruption, it is not surprising that energy stocks experienced a surge in market value. Schlumberger, for example, ended trading on Monday up more than 5% to reclaim a six-week high of $39 per share.
To be fair, much of the short-term impact of the attacks in Saudi Arabia, including the time that it may take to repair the damaged facilities and to restore production to normal levels, is probably already reflected in the current market value of most energy stocks. But other, longer-term factors that include heightened geopolitical tensions are more likely to trigger uncertainty regarding oil supply levels and keep a floor under crude oil prices in the foreseeable future.
Beyond The News Of The Day
With respect to Schlumberger, the events of the weekend alone do not seem enough to justify bullishness towards the stock, even if crude oil prices may remain higher for longer as a consequence. But they add to a list of favorable developments for the Houston-based company that might make a bet on the stock worth the risk at current levels.
First, drilling and production activity in most international markets (i.e. regions outside the capacity-constrained onshore North America space) have been recovering strongly over the past few quarters, reflecting what Schlumberger's former CEO Paal Kibsgaard has called "a more positive supply- and demand-balance". The company continues to see international E&P (exploration and production) investment growing at a pace of 7% to 8% in 2019, as oil majors look to replenish their reserves and trigger "the start of an overdue and much-needed multiyear international growth cycle".
Second, North America activity will likely reach its lowest levels in 2019, with the upcoming year looking a bit more promising. The decision by OPEC and Russia to extend production cuts until the beginning of 2020 should play a role in supporting production growth in the home continent. The improvement will probably not happen very fast, but further deterioration in North America production seems unlikely.
Don't Forget Valuations
Adding to the spike in crude oil prices and an improving global E&P environment is Schlumberger's modest stock price that is only a few dollars above ten-year lows. Shares trade at a forward P/E multiple of 20.3 that, while recovering, is still hovering around the low end of the trailing twelve month range.
While significant risks to investing in the energy sector will continue to exist, including volatile crude oil prices, a potential deceleration in global economic activity and slow-to-recover E&P budgets, making a bet on perhaps the best-positioned player in the industry makes sense to me. Therefore, and within the context of a diversified portfolio, Schlumberger appears to be worthy of consideration at current levels.