Analysis: SLB HAL

After you receive this Alert, we will be buying 150 shares of Schlumberger (SLB) at roughly $43.50. Following the trade, SLB will represent 3.28% of the portfolio.

As we wrote last Friday in our Weekly Roundup here in reaction to Schlumberger's fourth-quarter earnings results (which we wrote about here), we said we may be inclined to upgrade our rating back to a One when the shares were hit on a soft oil day. Our main takeaways from the Schlumberger quarter and the key reasons why the stock jumped roughly 8% in a single day session revolved around management's significant free cash flow generation (in a difficult environment, no less), with flexibility to live within their means.

We are getting that move lower this morning with WTI crude down more than 3%. At the same time, the oil field services group is being dragged down on Halliburton's (HAL) quarter, which saw a sequential fall in North America revenue. While North America remains a key point of weakness for the group, it is critical to keep in mind how Schlumberger is really an international company. More than 60% of Schlumberger's total sales in 2018 came from outside North America., and this compares favorably to Halliburton, where about 40% of sales are derived from outside North America. Having international exposure is a key differentiator for this group, especially during a time when international investment is expected to pick up. During Schlumberger's conference call, CEO Paal Kibsgaard laid out the expectation for top-line growth on the international side in 2019, a contrast of 2018's flat year. Accordingly, we are upgrading our rating back to a One.

As of late, we acknowledge we have been in-and-out of this position, buying 100 shares at about $37 at the start of 2019 in our Alert here, then selling that back in our Alert here) shortly after a 10% jump in share price. What has changed? We are more confident in our new One rating now that we have the benefit of a quarter that featured terrific cash flow ability during a difficult point in time that could mark the trough of the investment cycle. The results resolved what was the single largest question into the print and what has been the key factor that drove SLB to the depths below $40. That of course, was the sustainability of the current dividend. A +5% dividend yield does not look irrationally high when a dividend cut may occur, but now that the dividend has been backed by cash flow and future capital flexibility, a strong argument can be made that a ~4.5% dividend yield represents strong value with less downside risk than before (a product of yield support on the share price).