Missouri-based Wedgewood Partners said in its Q4 investor letter that it sold positions in Schlumberger Limited (NYSE: SLB) and Core Laboratories N.V. (NYSE: CLB). The letter also included the investment firm’s views on other companies, including Apple, Facebook, Charles Schwab, and Celgene. In this article, we’re going to take a look at the Wedgewood’s comments about SLB and CLB. Here is everything that the investor said:
During the quarter we sold our remaining oil services exposure. While these final sales were made largely before the plunge in crude oil later in the quarter, it is of little solace as our investment in both stocks would ultimately prove to be a poor investment – and worse still against the backdrop of a largely rising market. During our +4-year holding period each stock had occasion to be among some of our better performers, but such periods were few and short-lived.
Our primary investment thesis was based on our expectation that the global energy sector recovery, post-2014 industry depression level spending levels, would cycle into a classic multiyear upcycle in spending on oil well and rig maintenance, plus increases in spending on both exploration and development. In addition, the best of breed oilfield service companies traditionally possesses the better balance sheets and by far the highest full cycle profitability profiles.
While oil service spending has seen a significant recovery in the U.S. market, since bottoming in 2016, international upstream spending has been tepid, with budgets vastly below their 2013 and 2014 cycle peak levels. Furthermore, there have been few signs to-date of a broadbased pickup internationally despite conditions which would seem to be conducive to spending. In the end, our thesis predicated on historically longer, multi-year capex cycles was wrong. While our thesis proved right in terms of the booming renewal in U.S.-based capex spending, the inherent nature of the shorter-cycle, unconventional shale capex cycles proved too swift and too sizable as a force to reignite the much longer, and significantly more profitable international capex spending cycle.
Specifically, with the international benchmark Brent Crude oil reaching highs at $85 as recently as early October – roughly tripling versus early 2016 lows – and with stubbornly low capital budgets over the last few years, we had expected to finally see significantly more interest in spending for new projects and for deferred maintenance, but this has not yet materialized in any meaningful way. Furthermore, if Brent over $85 wasn’t enough to get some renewed momentum in international spending, even if it persisted for only a brief time, it wouldn’t bring the timing of the recovery in spending any closer. Adding insult to injury, while our investment thesis was not predicated on an attempt to forecast the price of oil (oil beta), as Brent oil prices eclipsed $80 per barrel during the past quarter – a multifold increase from 2015 lows – our energy stocks literally didn’t respond in kind. Again, while we were certainly aware that all energy-related equity prices tend to have a meaningful correlation with oil prices, our long-held view had been that this relationship is less fundamentally important to Schlumberger and Core Labs.
So, while we still believe both Schlumberger and Core Labs will benefit from an eventual recovery in international spending, we sold these stocks from the portfolio to fund faster-growing alternatives in other industries. The recent market correction has presented us with other opportunities that are trading at more attractive valuations than they were previously.
Shares of Schlumberger Limited (NYSE: SLB) are up more than 17% since the start of this year. Analysts polled by FactSet Research have a consensus rating of ‘OVERWEIGHT’ on the world’s largest oilfield services firm. Schlumberger is a popular stock among hedge funds tracked by Insider Monkey. At the end of the third quarter of 2018, 55 funds were holding stakes in the company, according to our database.
Core Laboratories N.V. (NYSE: CLB) is one of the largest service providers of core and fluid analysis in the petroleum industry. Shares of the company are up over 8% year-to-date. The stock has a consensus rating of ‘HOLD’, according to analysts polled by FactSet. CLB isn’t a popular stock among hedge funds we track. According to our database, only 14 funds held the stock as of the end of third quarter.