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Brent at a post-pandemic high

Matein Khalid
Brent crude has now reached a post-pandemic high of $77 and reinforced my conviction that energy will be the best performing sector of September 2021.

Saudi Arabia and Russia have ignored the Biden White House’s call to pump more oil and the quota discipline in OPEC+ is intact while Libyan oil remains offline due to the civil war and the US’s Afghan debacle means Biden cannot risk his dwindling political capital on a nuclear deal with Iran. Add a cold winter and Hurricane Ida’s catastrophic impact on offshore output in the Gulf of Mexico/Texan refineries and all the ingredients for a $80 Brent are now in place. This is great news for Schlumberger (SLB), the world’s leading oil service firm has a higher beta to oil prices than either Haliburton or Baker Hughes.

In this oil price milieu, SLB can well deliver $23 billion in revenue and EPS of $1.30. SLB’s restructuring in a Darwinian oil services market has seen it shrink in scale and focus more on its global state owned clients while downsizing North America. Even though Seven Sisters / NOC’s have cut their drilling budgets, SLB has managed to double its operating margins.

The valuation on SLB is not dirt cheap but not unreal either as long as black crude does not tank – which I do not think it will as long as China does not succumb to any more credit black swans.

Matein Khalid is Chief Investment Officer at Asas Capital

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