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Gold/Mining/Energy : Schlumberger - The biggest/baddest oil service company
SLB 46.24-0.2%May 24 4:00 PM EDT

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From: Dennis Roth7/23/2007 8:17:07 AM
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Another solid quarter from Schlumberger Goldman Sachs July 23, 2007

What's changed

Schlumberger posted strong 2Q results. EPS of $1.02 exceeded our $0.96 estimate and consensus of $0.95. Variance to our estimate of $0.06 was driven by:

(1) North America (+$0.01),
(2) Latin America (+$0.01),
(3) Middle East/Asia Pacific (+$0.02),
(4) WesternGeco (-$0.02),
(5) a lower tax rate (+$0.02), and
(6) other items (+$0.02).

We raised our 2007/2008 EPS estimates by $0.21/$0.47 to $4.15/$4.96.

Implications

(1) SLB's consistent solid execution remains unparalleled in the industry, although we think this is already reflected in the stock's premium valuation relative to the group.

(2) SLB's ability to weather a significant slowdown in Canada was impressive. This is partially attributed to management's foresight to lower the cost structure in 4Q2006/1Q2007.

3) The outlook for North America (NAM) remains uncertain, with capacity additions in pressure pumping serving to accelerate price erosion. Strong contract coverage in pressure pumping helped keep 2Q NAM margins stable; however, margins are likely to come under pressure when contracts are renegotiated in late 3Q2007.

(4) Strong 2Q performance was led by Middle East/Asia Pac, where margins reached a record-high 35.3% (+103 bp qoq). Management cautioned that strong margins may be difficult to sustain due to the favorable mix toward exploration in 1H2007. International exposure remains one of our favorite themes for the oil service group.

Valuation

SLB is trading at a 2008 EV-DACF/P-E of 14.9X/19.5X, versus 10.3X/14.1X for BHI and 11.1X/13.9X for HAL. We have raised our 12-month price target to $95 (14.5X 2008 EV/DACF), from $87 due to higher estimates.

Key risks

Key risks to our thesis include:
(1) A US/Global recession could result in weaker commodity prices and further E&P capex cuts; and
(2) weakness in natural gas prices could lead to further E&P capex cuts in North America.
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