"Valuations for even the best-placed, most well-established companies in the energy space are sitting at levels unseen since the late 1990s when oil prices collapsed to around $10 per barrel," says energy sector specialist Elliott Gue.
Here, the editor of The Energy Strategist looks at Schlumberger (NYSE: SLB), noting, "The firm active in just about every imaginable market and I regard the company as a top-notch indicator of ongoing trends in the oil services business."
"It's clear that there's been some slowing in demand, and the credit crunch has had an impact on the fundamental business. But the reaction in the stock market over the past three months goes well beyond even a worst-case scenario.
"Bottom line: Many energy-related stocks are pricing in a severe recession and recent action in the broader markets is reminiscent of sentiment characteristically seen near market lows. The short-term outlook for the energy patch is much better now than it was during the bear market in 1998 and 2002.
"I regard Schlumberger as a top-notch indicator of ongoing trends in the oil services business and, more broadly, international oil and gas drilling activity. I always pay close attention to what Schlumberger has to say in its conference calls and, as usual, this quarter's call was instructive.
"Schlumberger's cash and credit position is second to none. In a market where investors are worried about any debt or counterparty risk whatsoever, a company like Schlumberger should trade at a premium.
"Management noted that the company had $4 billion in cash and investments at the end of the quarter and $2.1 billion in undrawn debt facility agreements.
"Total debt net of cash is $1.7 billion relative to a market capitalization of close to $65 billion. Meanwhile, Schlumberger met its capital spending plans, paid down debt and bought back stock in the quarter while still adding to cash.
"And while weak economic growth and the credit crunch will have an effect, the impact in North America shouldn't be a huge factor for Schlumberger because it has less exposure to North American gas markets than many in its peer group.
"Further, there are some beneficial effects stemming from the credit crunch for established firms such as Schlumberger. Chief among those is that some of the drilling rigs, seismic ships and equipment once scheduled to come to market over the next few years is now unlikely to enter the market.
"The reason is simple: The construction of this equipment was financed by small startup firms that are, in turn, reliant on debt capital. Big companies with an established business can get access to credit at the current time; small startups can't.
"Finally, it's all about valuation. Schlumberger is trading at the cheapest valuation since the late '90s, even though the global oil market looks to be on firmer footing today than it was back then.
"Although there are valid concerns about short-term demand growth, the supply outlook is far weaker than it was 10 years ago. It's harder to increase oil production now than it was then. Buy Schlumberger."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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