Stockstradamus AKA Stocky’s Blog

Normally I don’t really think I’m that much smarter than most of the people active in the Stock Market but days like yesterday make me wonder.

The action in the oil services sector yesterday was SO FUCKING STUPID I’d rather bang my head against my desk than write about what happened.

The only consolation I get is knowing with 100% certainty that the long term story is more intact than ever. The short term story is intact too despite what the fucking morons did yesterday.

SLB - Schlumberger is the king of all energy services companies. I love listening to their earnings calls as they describe how they continue to kick ass. Yesterdays call was no different. They beat estimates handily. Profit up 35%, revenue up 20%. Great results and ahead of the estimates.

So why did the stock drop 12% yesterday??? Let’s take it from a WSJ article:

Third-quarter profit at Schlumberger, which is seen as a bellwether for the sector, was up 35% on strong international growth, but analysts saw only the depressing results from North America,  

Depressing results for North America??? SLB only gets 25% of it’s revenue from North America and the vast majority of the “depressing results” was due to weather related downtime from Rigs in the Gulf of Mexico. Overall revenue was only down 3% in North America for reasons (weather) not related to ongoing demand or pricing pressure.

SO WHAT’S THE BIG FUCKING DEAL?!?!?!?

What went over the wires was a quote from the CEO from his answer to the first analysts question. Pricing has declined in recent quarters for work SLB does on North American land based Natural Gas rigs. This is a pretty small part of SLB’s business. They say it will likely continue to decline due to overall high supplies of Nat Gas (less pumping) and an abundance of equpment available to do the work. BFD. A nice cold spell this winter and Nat Gas supplies will be down and pumping will ramp up. Even if that does not happen, who cares. It’s not that big a part of SLB’s business.

When asked where the bottom of the price decline was, The CEO said he didn’t know. How could he know? What other answer could he be expected to give? He already said 2008’s declines would continue to be “single digits” but who could possible know beyond that?

So that’s the quote that all the stories jumped on:

“Where the bottom is I really don’t know,” Mr. Gould said. 

That single quote, referencing a tiny part of SLB’s business, on a day when they blew away earnings estimates, took SLB down 12% and crushed the whole sector.

OIH, the ETF that tracks the sector tanked 6% and my beloved FSESX Fidelity fund which counts SLB as almost 25% of the fund was down over 7%.

This sector has been on a huge run recently so some profit taking could be expected but for a gem of a stock like SLB to go down 12% in 1 day is fucking criminal.  

SLB’s counterparts report next week, including the universally hated HAL - Halliburton (Great company - weak stock) which only went down 3%. Which in itself is fucking stupid since HAL has much bigger exposure to North American Nat Gas work.

Expect a not so great quarter from HAL which will likely take the sector down further. 

Or as a friggin genius analyst said:

“If [Schlumberger] isn’t safe, who is?” asked Dan Pickering of Tudor Pickering Energy in a note to clients. “North America really hurt [Schlumberger]. Rest of the group is probably guilty until [they] prove themselves innocent.”

Except that North America DIDN’T REALLY HURT SLB!!!!! Other than that, your note to your clients is accurate you fucking dolt!!!!

Excuse me while I bang my head against my desk………………….

OK, I’m back. That felt better.

So, to end this really long post, buy some SLB, NOV + RIG next week, assuming the market does not continue it’s nose dive. The era of cheap oil is O V E R. SLB, NOV, RIG and companies like them will be pumping profits for years + years. 

This fund continues to rock. Most of the holding are mostly trading with the price of crude but there are days like yesterday when crude goes down but these stocks go up.

Rarely do you see the opposite action. Over time FSESX is putting some serious seperation between it’s own value and the price of oil. While pullbacks are guaranteed to occur this fund will rocket higher. Take a look at the returns from the top 10 holdings. All of these companies have bookings several years out.

With returns Year to Date of more than 50%, Stocky loves this fund more than life itself.  

OK, Stocky finally gets to a stock pick or 2.

The theme of our times is (or shortly will be) Peak Oil. We are not running out of oil but we are running out of cheap oil. Mainly due to increasing demand. If the world consumtion were to stay at 86 million barrells per day then we’d be fine for the next half century. However, barring a worldwide recession, demand will continue to increase. That means squeezing every last barrell out of mature fields and extracting “unconventional” and hard to reach oil.

FSESX is a sector fund that specializes in Oil Services companies. It’s true that Fidelity uses these sector funds as a training ground for new fund managers but you can’t argue with the success of this fund. (And some of their other sector funds)

Take a look at the performance of the top 10 holdings as of Sept 1, 2007

Is there still room to grow? Oh yes, these companies are booked solid for the next several years and while they do fluctuate based on the cost of crude, their earnings will continue to rock as long as Oil stays above $45-$50. And even then, their backlogs will carry them for many quarters.

The reality is that Oil is never going that low again for any significant period of time and eventually the street will have to recognize that these energy services companies are no longer a cyclical play. Their P/E’s should be on a par with other high quality growth stocks instead of the 17 or so this fund sits at now. (Actually SLB’s P/E is much higher than the rest which brings up the funds average. Bringing the other companies just up to SLB’s P/E will make for some huge gains.)

Much more room to run.