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Gold/Mining/Energy : Schlumberger - The biggest/baddest oil service company
SLB 45.69+0.1%12:06 PM EDT

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From: Dennis Roth10/22/2007 2:33:12 PM
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Valuation premium seems excessive even after sell-off - Goldman Sachs - October 22, 2007

What's changed

Schlumberger reported 3Q07 EPS of $1.09 - above our estimate and consensus of $1.07. Variance to our estimate was driven by (1) a lower tax rate (+$0.03); weakness in North America (-$0.04), strength in Latin America (+$0.01) and WesternGeco (+$0.02). We raised our 2007/08/09 EPS estimates by $0.05/$0.00/$0.08 to $4.20/$5.18/$6.15, due to a lower tax rate.

Implications

(1) We believe the inline 3Q results could remove some of the premium embedded in Schlumberger’s valuation relative to peers; especially following Halliburton’s 3% beat. We recognize that Schlumberger is one of the best positioned companies in the group but see some downside to the relative multiple as investors begin to question SLB’s invincibility.

(2) Despite believe Friday’s 11% sell-off in SLB shares, we do not have a great sense of urgency to add to positions given the more bullish comments from peers and headwinds in the broader market.

(3) Comments made by SLB’s CEO were less optimistic than we were expecting but we believe the underlying fundamentals of the up-cycle are still intact. We lowered our expectations for North America but expect international growth to remain strong, led by Latin America, the Far East, and Russia – all expected to grow >25% in 2008. (4) Seismic results were excellent despite a decline in high margin multi-client sales. We raised our 2008/2009 WesternGeco operating income forecast by 15%/14% due strong demand and continued pricing power.

Valuation

SLB is trading at a 2008 EV-DACF/P-E of 14.8X/19.2X, versus 11.0X/14.8X for BHI and 10.6X/12.7X for HAL. Our $115 12- month price target is unchanged (17x 2008 EV/DACF) and implies 15% upside potential.

Key risks

Key risks include capacity additions, a sustained decline in commodity prices and the broader stock market indices.
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