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Schlumberger Earnings Preview: Deepwater Bottom Fishing

Schlumberger Ltd. (NYSE: SLB) reports first-quarter earnings today and if the company falls short of Wall Street’s expectations – and there’s a strong possibility that it will – you might consider buying some shares.

The world’s largest oilfield services company has taken a beating since a natural gas glut drained prices and led to a drop-off in drilling, but it’s now trading at bargain levels.

Schlumberger stock has fallen more than 12% since early February and 18% in the past year. But now that the stock is trading at about $70 a share – 35% below its 2011 peak – it looks ripe for bargain hunting.

Analysts at Sterne Agee, for example, have a $93 price target on Schlumberger, which translates into a 33% upside. And Credit Suisse (NYSE: CS) has set its target at $92 a share. Overall, analysts remain bullish on the stock with 23 rating it as a “Buy.”

Considering the bloated supply of natural gas on the market and the steep decline in natural gas drilling, it’s easy to see how Schlumberger’s stock could drop even further in the short term, but the bottom is likely drawing near. After all, the stock found a floor at $55 in August 2010 and $59 in September 2011.

A disappointing earnings release could put the Schlumberger close to those lows, at least for the time being, but the company will bounce back sooner rather than later.

Remember, Schlumberger is the world leader in oilfield services, and it has a significant technological edge guarding its primacy. Its “Q” technology was a major advance in high-precision 3-D surveying equipment when it was introduced more than a decade ago, and it’s grown into an absolute necessity in the modern era of exploration where finding and extracting deposits is more costly and complex.

Similarly, Schlumberger’s HiWAY technology is very popular in the fracking industry.

The company also stands to benefit from a global resurgence of deepwater drilling. Schlumberger operates in 85 countries and gets two-thirds of its revenue from outside North America, where most of the growth opportunities lie.

Schlumberger CEO, Paal Kibsgaard, said last month that deepwater drilling was at an all-time high in 2011, and he expects 200 new deepwater fields to come on-line over the next four years.

Even the Gulf of Mexico, which was devastated by the BP (NYSE: BP) oil spill, has seen the number of rigs operating in its waters return to near pre-crisis levels.

In the fourth quarter of the last fiscal year, Schlumberger’s profit rose 35.5% to $1.41 billion, or $1.05 a share. That’s up from $1.04 billion, $0.75 a share, the previous year. Revenue rose 21% to $10.97 billion.

The average analyst estimate this quarter puts profits at $0.98 per share – a rise of 38% from the company’s actual earnings for the same quarter a year ago. During the past three months, the average estimate has moved down from $1.08, largely because of Kibsgaard’s warning that the natural gas exodus would take a toll on his company’s profit margins.

Bottom line: Even with the recent decline in share price, Schlumberger has outperformed its peers, which are fighting through the exact same headwinds. Year-to-date, Schlumberger stock is roughly flat while rival Baker Hughes (NYSE: BHI) is down 15%. And in the past 12 months, Schlumberger is down just about 20%, compared to a 44% decline for Baker Hughes and a 30% drop for Halliburton (NYSE: HAL).

Schlumberger currently trades at a price-to-earnings (P/E) ratio of 19.82 and yields 1.58%.

Cheers,

Jason Simpkins

Jason Simpkins