Nobody likes to be early to a party. After all, it can be painfully awkward at times before the rest of the crowd shows up. In fact, you may even wonder why you bothered to come in the first place.

That’s what’s happening right now with one of our energy picks over at High-Yield Investing. 

In short, my readers and I spotted a solid company whose stock was so oversold — so unloved — that we just had to buy. And while we love collecting the 5% yield it’s paying right now, the stock price itself has yet to rebound. 

So to understand what’s going on (and why I think we’re overdue for a spike in the shares), let’s consider a completely different “unloved” sector for a moment… 

Left For Dead, But Not Dead Yet…
The tale of Barnes & Noble (NYSE: BKS) gave us a few unhappy plot twists, but seems to be finishing with a satisfying conclusion. After years of torment, stockholders were finally rewarded with a 50% upward jolt recently when rumors of a potential buyout turned out to be true. Hedge fund Elliott Management officially unveiled plans to take the bookstore chain private for $683 million.

While some underperforming locations will likely close, I’m hoping that the new owner can right the ship and keep most of the 600-plus branches open. As an avid reader, a trip to the bookstore has always been a real treat. Call me old-fashioned, but when I’m reading a thrilling page-turner, I like to actually turn the pages — not just swipe or push a button on a digital device.

As the playing field has tilted, Barnes and Noble’s annual sales have fallen to $3.7 billion in 2018 from $6.8 billion in 2014. That’s three billion dollars in yearly revenues that have simply vanished, most of them magically reappearing in the top line over at Amazon.com (Nasdaq: AMZN).

For investors, it has been brutal.

The new owner of Barnes & Noble will be hard-pressed to regain lost market share, although it has successfully returned Waterstones (the U.K.’s leading bookseller) to profitability after years of losses. And while BKS has been great to anyone who bought the stock within the past few months, those with longer holding periods are still sitting on sizeable losses — the stock has lost 50% over the past five years.

But the market has punished some even more severely (and I would argue undeservedly).

This Dominant Company Is Totally Unloved By The Street
While BKS has been cut in half, Schlumberger (NYSE: SLB) has lost nearly two-thirds of its value, falling precipitously to around $39 per share from a former peak of $108. 

Now, it hasn’t been a picnic in the oilfield equipment and service sector. But the company isn’t going toe-to-toe with Amazon either.

It’s true that big oil exploration and production (E&P) customers are more disciplined with their spending these days. But the magnitude of this plunge is hard to reconcile. Unlike Barnes & Noble, Schlumberger has managed to deliver back-to-back years of revenue growth. And the company produced a healthy $5.7 billion in operating cash flows in 2018 — more than double the levels from five years ago.

So is the oil and gas industry following print media into relative obscurity? I rather doubt it. The latest forecast calls for annual global energy demand to rise by 27% (or 3,743 million tons of oil equivalent) by 2040. And even with renewable power on the rise in many places, hydrocarbons will still account for between 75% and 80% of the world’s power over the next two decades.

That won’t be possible without Schlumberger, which operates in 85 countries worldwide and has the dominant No. 1 market position in over a dozen categories. From fracking/pressure pumping to high-resolution seismic data, the company has the tools and analytical expertise to help producers evaluate oil and gas deposits and drain them in the most optimal manner.

The point is, there is a reason why we added SLB to our High-Yield Investing portfolio back in February. This firm is down, but it’s certainly not out — which is why I’m accumulating more shares at these dirt-cheap prices.

The Case For SLB
As mentioned above, SLB has been on a downhill slide.

Two things have weighed on investor sentiment lately. The first is an S&P credit outlook downgrade for the entire oil service sector. The second is a sudden 20% contraction in oil prices over the past few weeks. Benchmark Brent crude has slid to $60 per barrel from a recent peak near $74, fueled by trade jitters and an unexpected inventory build. (Prices have since rebounded to about $65.)

Still, let’s put things in perspective. When oil prices bottomed in January 2016, SLB was trading above $70 per share. Since then, oil prices have more-than doubled to the $60s from $30, while SLB has nearly been cut in half to $39 from $70. 

Unless there is an inverse relationship between oil prices and oilfield service work, it’s hard to explain these two moving in polar opposite directions.

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Large producers such as ExxonMobil (NYSE: XOM) are prioritizing dividends and buybacks these days, which means less emphasis on new drilling projects to boost production and reserves. Still, when you haul in $6 billion in quarterly profits, you can certainly afford to do both.

Forget growth — these customers must invest heavily each year just to maintain their output. The International Energy Agency estimates that the world needs to find 3 million barrels of new daily production each year just to replace what is lost to tapped-out wells that go dry.

After years of underinvestment, upstream oil producers have replenished their checkbooks and are expected to spend a combined $425 billion in 2019. Many are boosting their CapEx budgets for the first time in at least five years.

We haven’t seen the financial impact just yet. Schlumberger’s first-quarter revenues tallied up to $7.9 billion, an increase of 1% from a year ago, but down 4% from the prior period. That’s hardly cause for celebration. But nor is it cause to send an already underpriced stock diving even further into the abyss.

As we progress through the remainder of 2019, this looks to be a tale of two markets. Schlumberger expects oilfield spending in North America to be down 10%, but it expects international spending to rise nearly 10%. Fortunately, it has the highest foreign exposure in its peer group. Almost two-thirds of the company’s revenues come from overseas.

Action to Take 
There was one passage in the quarterly earnings release that struck me as particularly salient… “We are seeing the start of a return to exploration activity. Notably, new discoveries in 2018 were the lowest since 2000.”

Oil producers can only take their foot off the gas pedal for so long. And they’ve been coasting for a while. I think that’s about to change, particularly overseas. Schlumberger posted an 8% uptick in international revenues in the first quarter, with numerous big contracts and awards in the drilling and reservoir characterization segments.

With SLB close to the lowest level in over a decade, it won’t take much improvement to stimulate a rally. That’s why I recently told my High-Yield Investing subscribers that we were adding more shares of this stock to the portfolio a couple weeks ago. We may have been a little early to the party, but I’m convinced we’ll be glad we came by the time it’s all over.

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