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Gold/Mining/Energy : Schlumberger - The biggest/baddest oil service company
SLB 47.48+4.0%4:00 PM EDT

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From: Dennis Roth4/21/2008 8:30:25 AM
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Schlumberger, Ltd. (SLB): Reiterate Buy rating following 1Q; Raising price target to $110 - Goldman Sachs - April 21, 2008

What's changed

We reiterate our Buy rating on SLB and have raised our 12-month price target to $110 from $98, which is a midpoint between our “mid” and “high” trading values. Our new target reflects our increased confidence in 2008 estimates, accelerating growth in North America, and our view that SLB is best-positioned to capture the growth opportunities associated with new offshore rigs coming over the 2009-2011 timeframe. We also slightly adjusted our 2008-2010 EPS by -0.9%, +1.2% and +3.6%

Implications

While the 1Q results were $0.05 weaker than expected, SLB’s outlook was quite bullish as (1) stimulation pricing in North America is “definitively bottoming”, (2) pricing leverage appears to exist for other North American services, (3) 2009 revenue growth should be higher than 2008, and (4) SLB announced an $8 billion stock buyback by 2011. We expect a similar scenario of relatively lackluster 1Q results offset by bullish outlooks for several of the remaining services companies.
Admittedly, we are surprised by the consistent strength in the stocks, as this group has clearly experienced a re-valuation to higher multiples driven by
(1) rapidly increasing commodity prices,
(2) increased confidence in estimates, and
(3) less recession-driven uncertainty than other sectors.
The OSX now trades at a 21% premium to the S&P 500 versus a 9% discount only 4 weeks ago. Given the run, for the sector broadly, we would wait for a pullback rather than chase the rally.

Valuation

We raised our 12-month price target to $110 from $98 (18.3x 2009 EPS). SLB is trading at a 2009 P/E of 17.0x vs. 13.1x for BHI.

Key risks

WesternGeco sales were weak in 1Q due to timing delays and will likely be lumpy for the remainder of 2008. A pullback in oil prices is also a risk.
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