Wall Street Is Wrong About Schlumberger: Opinion

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Tim Begany

NEW YORK ( StreetAuthority) -- If I had to describe the stock market in two words, then I'd pick "shortsighted" and "skittish."

A brief hiccup in revenue growth, a discouraging word from management about quarterly earnings or even a bit of bad press can sometimes trigger a significant selloff.

This sort of thing might actually be comical if real money weren't at stake.

One of the latest examples involves an energy stock familiar to most investors: Schlumberger ( SLB), the world's largest provider of technology, information (i.e., seismic surveys), transportation services, project management and other services to the oil and gas industry.

The company generated $39.7 billion of revenue and $5 billion of net income in 2011.

The stock has taken a hit because CEO Paal Kibsgaard said decreased business related to slumping natural gas prices in North America "represents an element of uncertainty" in 2012. This area is responsible for about one-third of Schlumberger's revenue.

He added that, during the first quarter, downward pricing in natural gas also affected oil, and the frequent need to move drilling equipment from natural gas fields to oil deposits increased costs and reduced operational time.

"Together, these factors will have an impact on our results both in North America, and overall, in this and in the coming quarters," Kibsgaard cautioned.

Schlumberger's stock has fallen about 5% since Kibsgaard made these comments on March 26, from $73.61 to about $70 a share.

The stock actually started to slide about one month ago, however, as the market began to anticipate this sort of negative news. Shares are down a total of 12% in the past four weeks.

This is great for patient investors -- the Buffett types who love to grab high-quality stocks when the rest of the market, skittish as it can be, has lost sight of the fantastic long-term potential. And long-term potential is exactly what Schlumberger has now, just like it did in the days leading up to Kibsgaard's warning.

It seems the market has totally forgotten Schlumberger operates in 85 countries and gets two-thirds of revenue outside North America, where most of the growth opportunities lie.

Resource-laden Russia is just one example. Schlumberger is No. 1 in that country's $15 billion oilfield services industry, with a 12% market share, and the industry is projected to triple in size by the end of 2017.

Schlumberger is well-positioned to participate in this growth because it's close with many Russian national energy companies, so it's typically a front-runner in the race for the most lucrative contracts. Schlumberger has similar situations in other fast-growing countries, too, like Mexico and Brazil.

To help keep its leadership position, Schlumberger stays on the cutting edge of technology and has developed a reputation for highly successful R&D. The company's proprietary "Q" technology, for example, was a major advance in high-precision seismic survey equipment when it was introduced more than a decade ago, and it's still top-of-the line today.

Schlumberger introduced its HiWAY hydrofracking technology in July 2010, which improves well productivity by 53% while using less water and proppant (sand, gravel or other materials used to create and hold open factures in shale deposits where oil or gas is trapped).

HiWAY is quickly becoming a hydrofracking method of choice domestically and abroad.

Despite all the economic troubles of the past three or four years and the recent disruption in Schlumberger's North American operations, earnings have grown rapidly, rising 23% annually for the past five years.

Analysts project earnings will keep growing at a very nice 15% rate, rising from $3.51 to $7.06 a share by early 2017.

Based on this, I think shares of Schlumberger could double in price to around $140 in the next five years, because investors have historically been willing to pay about a price-to-earnings ratio of about 20. ($7.06 X 20 = $141.20).

Risks to Consider: Low natural gas prices are the main concern right now, and the situation would only worsen if prices fell more, especially if natural gas dragged oil down with it. This would further dampen drilling activity and hurt demand for Schlumberger's services.

Action to Take: If the economy was like last year, then I'd be a lot more concerned about the possibility of falling energy prices and the effect they would have on Schlumberger's performance. But because the economy is improving, albeit slowly and unevenly, I think the growth scenario I've described here is much more likely.

Investors who are interested in Schlumberger should consider buying now. At 27% below the one-year high and 37% below the five-year high, the stock looks reasonably priced.

Tim Begany does not personally hold positions in any securities mentioned in this article.

StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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