Wells Fargo Upgrades Schlumberger As 'Execution Trumps Deepwater Risk'

In a report published Monday, Wells Fargo analyst Judson E. Bailey upgraded the rating on Schlumberger Limited. SLB from Market Perform to Outperform. The valuation range has been raised from $88-100 to $93-103.
Analyst Judson Bailey said that factors have emerged to mitigate the risks associated with a decline in deepwater and offshore activity.

In the report Wells Fargo noted the primary factors for the upgrade in rating:

• Decline in Schlumberger’s shares
• Significantly better-than-expected margins that appear to be “sustainable through the downturn”
• Expectation of stronger growth in the Middle East over the next few years
• A quickly evolving oil service landscape that “we expect to favor diversified service companies with technology, scale and diversity”

Referring to the company’s margin performance, Bailey mentioned that it had been achieved through “a combination of proactive (and aggressive) cost cutting, excellent execution, and the acceleration of its transformation initiatives.”

“Although pricing concessions have negatively impacted revenue and margins, growth opportunities throughout the Middle East continue to shape up better than our initial expectations as the GCC countries (Gulf Cooperation Council) continue to invest in order to grow production and market share, a trend that should favor SLB and help to partially offset further deepwater weakness,” the analyst added.

The EPS estimates for 2015, 2016 and 2017 have been raised from $3.38 to $3.56, from $3.57 to $3.70 and from $4.54 to $4.70, respectively.