New Trade $SLB: Schlumber Party

by Dan July 16, 2015 1:36 pm • Commentary

Event: Schlumberger (SLB) reports Q2 results tonight after the close. It’s the largest oil service company, and the first large cap in the sector to report. The options market is implying a 3% one day move which is shy of the 4 qtr avg move of about 4%. With the stock at $84, the July 84 straddle (the call premium plus the put premium) is offered at $2.55. If you bought that and thus the implied move, you would need a move above $86.55 or below $81.55 to make money, or about 3% in either direction.  

Price Action / Technicals:  Despite trading in a 25% range in 2015, and down 30% from the all time highs made a year ago, the stock is only down about 1.5% on the year.

The three year chart below shows the stock’s epic breakout in mid 2013, and the stock round-tripping all of the performance from the highs.  The set up very much resembles a head and shoulders top formation with $80 on the downside important long term support serving as the neckline:

[caption id="attachment_55398" align="aligncenter" width="600"]SLB 3 yr chart from Bloomberg SLB 3 yr chart from Bloomberg[/caption]

Expectations / Valuation: after three years of earnings growth in the mid teens % and sales of 7%, analysts expect earnings to decline 38% (on an adjusted basis) and sales to decline 23% in 2015.   On a trailing basis, the stock is trading at its lowest P/E multiple since the financial crisis, and on a forward basis near 5 year highs:

[caption id="attachment_55401" align="aligncenter" width="300"]from Bloomberg from Bloomberg[/caption]

My View:  Expectations are not high, and with the looming threat of Iranian crude flooding the market once sanctions are lifted, a test of crude oil’s lows could be back in the cards. Oh and not to mention weak demand from China. If that were the case stock’s like SLB could most likely re-test their prior lows.

One trade I like is financing the purchase of longer dated puts by selling nearer dated ones. So here’s what I’m doing:

Trade: SLB ($83.85) Buy July / Aug  put calendar for 1.20

-Sell to open 1 July 81 put at .40

-Buy to open 1 Aug 28th weekly 81 Put for 1.60

Break-Even on July Expiration (tomorrow’s close):

Max profit at $81 on tomorrow’s close, max risk of $1.20 with a sharp move above current levels or below $81

Rationale:  We like the idea of playing for a breakdown in the coming weeks as crude oil appears to have no shortage of headwinds in the near term.  While vol doesn’t exactly appear high out in late Aug, we think it makes sense looking to finance the purchase.