Schlumberger, Ltd. (SLB): Lowering estimates and price target, but maintain Buy rating - Goldman Sachs - 01/21/08
What's changed
We lowered our 2008, 2009, and 2010 EPS estimates for Schlumberger by 8%, 6% and 4% to $4.80, $5.93, and $6.62 following the fourth quarter results. Our new estimates reflect a reduction in our margin assumptions due to weaker than expected pricing pressures in North America and modest adjustments to our international growth forecasts.
Implications
Schlumberger’s 4Q 2007 earnings miss and comments that 2008 would be a “transition year" is disappointing for the entire sector and calls into question revenue growth forecasts and margin assumptions for the oil services companies. With pricing pressures and competition looming in North America, we believe North American-exposed companies (HAL, BJS) may be at risk as they report over the next-few weeks. We do not see many catalysts for the sector in the near-term, even after the severe decline in valuation, and we believe macroeconomic concerns (US & global GDP growth) will most influence the sector’s performance over the next few months. Therefore, we remain Neutral on the group through earnings season. For SLB specifically, we believe its unmatched global presence positions it well to take advantage of the offshore rig cycle beginning in late 2008, the robust international land drilling market, and widening national oil company (NOC) project management opportunities. So, while 2008 may be a "transition year", 2009 and 2010 will not, and investors should use the stock’s weakness to begin building positions.
Valuation
We lowered our 12-month price target for SLB to $92 from $106 (19.2X 2008 EPS) to reflect our estimate revisions. SLB is trading at a 2008 P/E of 16.6X versus 12.7X for BHI and 10.8X for HAL.
Key risks
Weaker-than-expected global economic growth or lower-than-expected oil company spending internationally. |
