"The oil-services sector remains my favorite long-term play in the energy industry," says sector specialist Elliott Gue. In The Energy Strategist, the advisor looks to industry-leader Schlumberger (NYSE: SLB).
Gue explains, "Oil services firms will benefit directly from the increasing technical complexity of oilfield development. International business is the primary driver for Schlumberger, which generated only 22% of its revenues from North America in 2008.
"The important question is, where do we sit in the cycle for international operations? In my view, the second half of 2010 will mark the beginning of a new uptrend.
"This outlook suggests that oil-services stocks will experience a big run-up in the final months of 2009, well before margins actually bottom.
"I have the utmost respect for Schlumberger as a company and CEO Andrew Gould take on the state of the business; given its scope, the firm has an unparalleled perspective on conditions in just about every imaginable oil or gas-producing region of the world.
"In the first quarter of 2009, Gould predicted that the current cycle outside of North America would resemble prior down-cycles for these markets -- that is, the total down-cycle would last roughly 18 months and, peak to trough, would result in a roughly 50% decline in Schlumberger's margins.
"If we assume an 18-month cycle with the third quarter of 2008 as the top, we would expect to Schlumberger's international margins to bottom out at around 16% in the first part of 2010.
"In Schlumberger's second-quarter conference call, several analysts asked the management team if this was still a logical expectation. Management indicated that those forecasts remain valid.
"Because most companies start forming their 2010 budgets in the latter months of 2009, the level of crude oil prices at that time will be a key determinant in this decision-making process. Although Schlumberger doesn't specify a magic price threshold, Gould's comments imply that crude prices need to approximate recent levels in the low $70s to support a jump in activity.
"The good news is that if oil prices do remain around $70, Schlumberger believes the turn in margins could happen more quickly than it anticipated earlier in the year.
"It appears that international markets are at, or within a quarter or two of, an important cyclical low. A big decline in oil prices through year-end is the only event that might derail such a recovery. Bottom line: The cycle for oil services stocks appears to be at or near its lows. This bodes well for the oil-services space."
Steven Halpern's TheStockAdvisors.com offers a free daily overview of the favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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