This Analyst's Outlook for Schlumberger Limited Looks Overly Optimistic

By Markets Fool.com

Continue Reading Below

Image source: U.S. Occupational Health and Safety Administration.

What: Analysts at Oppenheimer lowered their price target for oil services company Schlumberger today from $110 to $101 while maintaining a rating of outperform on the company's stock.

So What: According to Oppenheimer's lead oil services analyst James Schumm, overall drilling activity is expected to continue declining here in the U.S. as producers cut back spending, leading to idled rigs and decreased activity in other oilfield services. This will likely result in Schlumberger and other companies in the space seeing a large decline in revenue this quarter compared to last one, and further declines next quarter.

That may sound like bad news, but the decline in activity -- he believes -- will stop somewhere in the middle of this year and that drilling activity will stabilize and potentially start to increase again by the end of the year.

If this situation were to play out and shares of Schlumberger were to meet the company's price target, it would represent an increase in share price of about 25% from current trading prices.

Continue Reading Below

Now What: Let's remember one thing, always take analyst ratings and price targets with a big grain of salt. These projections are always built on several "if this happens" -- which is no guarantee -- and are then assigned certain earnings estimates and valuation multiples that may or may not ever be met. There are simply too many things that can alter these assumptions and projections, so there is no way for us to know with any certainty whether the bottom of the drilling market will come in the middle of the year as this report suggests.

The chances that the situation portrayed in the Oppenheimer report will actually follow the script is slim at best, so if you are developing an investment thesis on that script there's a pretty good chance you will be disappointed. However, there are other reasons to be bullish about investing in Schlumberger.

Truth is, oil is a cyclical commodity. Always has been, probably always will be,and trying to time your investments in this space based on the crests and troughs is an exercise in futility. Besides, if you try to time your entrance and exits into a company like this, you may very well be missing out on long-term returns that have beat the market.

SLB Total Return Price Chart

SLB Total Return Price data by YCharts.

Instead of fretting over market timing, you could look at this as an opportune time to pick up shares on arguably the best oil services company in the business at a pretty cheap price compared to what they normally cost. Mr. Schumm's outlook for Schlumberger might look at bit rosy for even the most optimistic investor, but I can't argue with the idea of buying shares of Schlumberger.

The article This Analyst's Outlook for Schlumberger Limited Looks Overly Optimistic originally appeared on Fool.com.

Tyler Crowe has no position in any stocks mentioned.You can follow him at Fool.com under the handle TMFDirtyBird, onGoogle +,or on Twitter,@TylerCroweFool.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.