Name That Trade – $SLB: Schlumber Party

by Dan April 14, 2015 12:25 pm • Commentary

Shares of oil driller Schlumberger (SLB) are down about 25% from the 52 week and all time highs made in July 2014.  The stock has bounced off of $80 for the third time since December, and has now rallied 18% off of the January lows, breaking the downtrend that has been in place from the highs:

SLB 1yr chart from Bloomberg
SLB 1yr chart from Bloomberg

The $90 level appears to be important, short and long term technical resistance:

SLB 2yr chart from Bloomberg
SLB 2yr chart from Bloomberg

The stock has obliviously benefited from the 25% rally in crude oil from its March lows and the potential for consolidation in the oil patch has aided sentiment of late.

SLB reports Q1 after the close on Thursday, the options market is implying about a 4% one day move, which is a tad rich to the 4 qtr avg move of about 3.25%.  

Analysts expect 2015 earnings to decline 40% from 2014’s peak earnings of $5.57 a share, on a 19% sales decline.  The stock on a trailing basis, at 16x earnings, looks cheap to itself but on a forward basis at 27x it is far from. The question that investors will not be able to answer anytime soon is whether or not the company can cut costs and increase profitability at $50-ish oil.  Obviously lower for longer oil will cause lower day rates for drillers and lower activity, while a quick move back to $70 would cause a rush into shares of stocks like SLB.

In the very near term it will be Q2 guidance that drives the train, and with the stock at $89, the April 17th (Friday expiration) 89 Straddle is offered at about $3. If you thought the implied move for earnings was cheap and bought the straddle you would need a move above $92 or below $86 to break-even by Friday’s close.

With 30 day at the money implied vol in SLB at about 24.50, it is my sense that a continued consolidation in crude, or a rally, would cause options prices to decline materially in related stocks, making long premium strategies a difficult way to make money on a directional basis, but also offering yield enhancement opportunities for long holders.

[caption id="attachment_52754" align="aligncenter" width="600"]SLB 1yr chart of 30 day at the money IV from Bloomberg SLB 1yr chart of 30 day at the money IV from Bloomberg[/caption]