As we mentioned in an earlier Alert, we have initiated a position in Schlumberger (SLB), buying 900 shares at $83.32.

Schlumberger is the largest oil service company in the world, yet continues to gain market share and generate top-tier full cycle returns. We expect the company to maintain its market supremacy and see increased opportunity for market share gains over the next three years, assuming a successful completion of the Halliburton (HAL)/Baker Hughes (BHI) deal. While Schlumberger doesn’t have as much direct exposure to North America, its global diversification makes it a much safer bet and we believe it is one of the best ways to gain exposure to our positive view of the sector long- term given its lower risk profile and superior execution.

The company has numerous competitive advantages, including technological prowess, scale and home-grown talent. We also see upside potential for Schlumberger as it continues its focus on internal execution and the key initiatives outlined at its June 2014 Investor Day. We think this year’s downturn could allow some of these goals to materialize faster. The key initiatives include: 1) a 20% increase in employee productivity; 2) a 10% reduction in unit support costs; 3) a 25% reduction of inventory; 4) a 100% increase in asset utilization; and 5) free cash flow in excess of 75% of earnings.

Schlumberger's competitive advantages are truly exemplary. For some context, its annual research and development budget is larger than the entire market cap of some of its competitors. Because of this, the company continues to successfully develop products that save costs for customers while often increasing oil recovery rates. As such, it is able to price its products and services higher and earn superior margins.

The company’s biggest competitive advantage, however, is technological, which keeps it one step ahead of the competition. While this advantage is typically associated with exploration and complex international activity, we think it has also helped in North America where Schlumberger has grown its market share by 205 basis points relative to its largest peers over the past four years and achieved industry-leading margins. Another competitive advantage is scale and home-grown talent that allows the company to be global, yet local in most international markets, where having native leadership is key.

Schlumberger also has one of the best balance sheets in the industry with a net debt-to-capitalization ratio of 11% and a leverage ratio of 0.4x. Therefore, it is well positioned to weather a downturn in the market and perhaps profit from it longer term with strategic acquisitions. Indeed, its stock tends to outperform peers in down markets, and the shares have been considerably de-risked after having fallen 30% over the past eight months.

Meanwhile, we believe a Halliburton/Baker Hughes combination will have positive implications for Schlumberger. While the combined entity will be able to compete more effectively, the consolidation will remove a formidable competitor from the market and will in all likelihood lead to favorable impacts on pricing. In particular, the merger could result in a virtual duopoly for integrated projects, where scope is critical.

On valuation, we’re willing to pay 14x estimated 2015 EBITDA (resulting in a $105 price target), which is justified given our expectations for 25%-30% earnings growth in 2015/2016. Overall, we view the risk/reward trade-off as positively skewed, as the market is discounting significant reductions in activity, while in reality it should experience a modest deceleration at most. Overall, Schlumberger's immense scale and best-in- class execution make us confident in its ability to drive significant value over the long term.

Regards, Jim Cramer, Portfolio Manager & Jack Mohr, Director of Research - Action Alerts PLUS DISCLOSURE: At the time of publication, Action Alerts PLUS was long SLB. Want your alerts faster than e-mail? Sign up for text message alerts (click on the Premium tab at http://www.thestr eet.c om/alerts/.