The 'Risk-Off' Way To Play Oilfield Services

• Shares of Schlumberger Limited (NYSE: SLB) have declined 20.43 percent year-to-date, reaching a low of $67.65 on October 1.
• Robert MacKenzie of Iberia Capital Partners has maintained an Outperform rating on the company, with a price target of $94.
• Given the company’s “stellar” topline execution and cost management, MacKenzie believes that Schlumberger is a “risk-off” way to enter the oilfield services segment.

Analyst Robert MacKenzie continues to believe that “the company’s transformation program and rapid rightsizing of the organization will yield superior operating profitability.”

Management indicated that a recovery in North America and the international markets was unlikely until 2017.

Related Link: Jim Cramer Sees More Problems Ahead For Oilfield Companies, Cites Schlumberger's Q3 Report

“While we agree that E&Ps will seek to strengthen their balance sheets when oil prices recover, we believe this will be done primarily through equity raises to pay down debt as opposed to using operating cash flow,” MacKenzie stated.

According to the Iberia Capital report, E&P companies need to increase their spending quickly following a rebound in commodity prices, driven by capital infusions and higher cash flow.

On the other hand, E&P companies appear to be resistant to adopting new technologies, being concerned with minimizing costs at present.

“Ultimately it seems like E&P companies' procurement processes need to change for Schlumberger to realize the full potential of technology in North America,” the report explained.

The company has reported its Q3 results, with higher than consensus margins for both the U.S. and the international markets. EPS was also above the consensus, although below the estimates. However, the company reported its MEA margins and revenue below the consensus and estimates.

The 4Q15 and 2016 EPS estimates have been lowered to reflect “a slightly more bearish view of international E&P spending in 2016 as well as additional weakness in NAM the next couple quarters.”