JPMorgan upgrades Schlumberger, says rising oil prices can boost stock by more than 20%

Published Thu, Oct 7 20216:11 AM EDTUpdated Thu, Oct 7 20211:49 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Oilfield services stock Schlumberger has major upside as oil prices appear likely to remain elevated for the next few years, according to JPMorgan. Analyst Arun Jayaram upgraded the stock to overweight from neutral, saying in a note to clients Thursday that an increase in international production levels should boost Schlumberger. "Our upgrade reflects the company's advantaged portfolio that is poised to deliver strong earnings growth from the global recovery in upstream spending and further margin expansion. Our favorable thesis is predicated on our view that U.S. [exploration and production] capex restraint will lead to less U.S. shale growth, but higher levels of international activity to support the increase in productive capacity," the note said. JPMorgan said that U.S. companies being cautious on expanding capacity would lead to a sustained higher price for oil, since U.S. firms have recently been able to produce it more cheaply. That should be good news for Schlumberger, which has a high level of exposure to international producers. "During the better part of the past 10 years, U.S. shale has represented the marginal supply source, which has largely capped oil prices at the marginal cost of U.S. shale in the mid-$50s or lower. We expect this dynamic to change in 2022 and beyond with OPEC+ now poised to return to its role as the marginal producer (i.e., highest cost barrel needed to meet demand) starting in 2022," the note said. The price of oil has risen sharply over the past six weeks, with European benchmark Brent crude rising above $80 per barrel. Schlumberger has so far been underperforming its energy sector peers during the oil rally. The stock has gained less than 4% since the end of July, while the Energy Select SPDR Fund has jumped 10%. JPMorgan raised its price target on Schlumberger to $37 per share from $28. The new target is 23.6% above where the stock closed Wednesday. -- CNBC's Michael Bloom contributed to this report. Correction: JPMorgan's new price target on Schlumberger is 23.6% above where the stock closed Wednesday. An earlier version misstated the percentage.

A oil rigger at the Schlumberger field prepares pipes in Midland, Texas on December 16, 2008.

Kirk McKoy | Los Angeles Times | Getty Images

Oilfield services stock Schlumberger has major upside as oil prices appear likely to remain elevated for the next few years, according to JPMorgan.