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Morgan Stanley Reiterates Schlumberger As Core Overweight In Large-Cap Energy Space

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Although there is a lack of visibility into a 2Q trough, Morgan Stanley’s Ole Slorer believes Schlumberger Limited. SLB's earnings capacity remains intact “as the cycle turns”.

Slorer maintains an Overweight rating on the company, while raising the price target from $105 to $110, driven by Schlumberger’s high operating leverage and increased confidence in “swift oil market rebalancing.”

Macro Overview

The analyst mentioned that the company provided an “extremely constructive” macro commentary, highlighting a decline in non-OPEC production by 930 thousand bpd through 1Q16.

Half of this decline was driven by North America, while the remaining half was due to international non-OPEC production, led by Mexico, Colombia, Brazil, the U.K. and China.

“Going forward, SLB expects the current oversupply to largely disappear by YE 2016, with non-OPEC production to be down by 1 million bpd y/y by 4Q16 and the call on OPEC to increase by 1.8 million bpd from current levels,” the Morgan Stanley report said.

Going Forward

Schlumberger expects limited sources of short-term supply to be brought back to market in 2017. Initial incremental supply is expected to come from North American unconventional and international conventional onshore basins, especially from Russia and the Middle East.

“US service capacity could be brought back quickly, delaying a pricing recovery, while int'l pricing concessions have mechanisms to reverse in response to higher oil prices,” Slorer added.

Slorer also believes that North American margins were likely to see the greatest upside in 2017, driven by a volume-driven recovery.

Apr 2016Morgan StanleyMaintainsOverweight
Apr 2016Cowen & CompanyMaintainsOutperform
Apr 2016NomuraMaintainsBuy

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