Monday, Credit Suisse upgraded Schlumberger Ltd. (SLB) shares to Outperform from Neutral and increased its price target to $76 from $72.
Analyst Handler noted that BHI's market share slippage in third quarter of 2009 highlights risk of further erosion as new contracts are executed. SII's equity issuance highlights cash flow concerns, and thus perhaps some constraint in how quickly it can grow to be more of a competitor.
And WFT faces several challenges, including near term results, FCPA resolution and cash flow concerns. Thus, SLB is a "clean" alternative. The analyst acknowledges risks to the upgrade, however, including valuation, longer term risks to market share and margins from greater competition and, nearer term, a focus on earnings recovery, SLB's 23% EPS growth in 2011 is well below peers' 58%.
The analyst tweaks his target multiple to 22x from 21x to reflect optimism about earnings outlook from the expected more favorable tone on international and exploration spending, including seismic, through upcoming 2010 oil company budgeting and the impact of cost savings efforts, i.e. margins in the U.S. and Middle East/Asia impressed in third quarter of 2009.
At 22x the analyst's 2011 EPS, he sets his target multiple at a 30% premium to service peers versus 14% in prior cycles, but in line with 2006-7 when international oil versus U.S. gas preference peaked. The analyst would expect target multiples to compress eventually as we get more comfort in peers' operations.
The analyst noted that but, for now, SLB's premium is also supported by its stronger balance sheet, 6% net debt to cap currently, and cash generation, $3.35 per share of FCF expected in 2010-2011 versus a peer average of $0.12.
Currently, SLB is up $1.87 or 2.95% and trading at $65.21.
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