Our Hold recommendation on Schlumberger Limited (SLB) shares remains unchanged as we continue to believe that Halliburton Co (HAL) and Baker Hughes Inc (BHI) offer better value in this space.
The company's results have benefited from ramped-up oilfield activity levels, particularly in regions outside North America, due to crude oil's strength. This trend is expected to remain in place going forward, with an improving onshore North American outlook complementing continued international strength. Plans to make additional share buybacks of $8 billion should also support valuation.
Schlumberger enjoys strong leverage to the current oilfield cycle. While activity levels in North America, particularly in the onshore markets, have reached peak cycle levels, most of the other global markets are at much earlier stages. We think that this plays to Schlumberger's strengths. Another significant growth driver for Schlumberger is Integrated Project Management (IPM).
We have reduced our 2008 earnings estimate ($4.82 vs. $5.15) and kept our 2009 estimate unchanged at $5.90. On June 13, Schlumberger declared that it has entered into an agreement with
Hess Corporation (HES) to supply geological, geophysical, reservoir engineering, economics, drilling, and production software. On June 8, Schlumberger announced the acquisition of Integrated Exploration Systems (IES), a supplier of advanced petroleum systems modeling software and services.
Given the level of valuation premium relative to peers as well as the S&P 500, we believe that Schlumberger shares already discount the company's strong underlying fundamentals. This, we think, leaves little room for further upside from current levels.
