Although one should expect a time lag between a rising oil price and increased spending, there are early signs (beyond US shale producers) that this is starting to occur, which may also give Schlumberger’s management the opportunity to increase pricing for the first time in many years.
Our US analysts conclude that current expectations underappreciate the company’s potential recovery in sales, margins and free cash flow, especially given the superior profitability of its international operations, and we believe the shares represent good value at current levels.
Union Pacific, another recent holding for the fund, is a US railroad company with 32,000 miles of track, transporting freight.
Revenues are strongly linked to the US industrial cycle, which has been experiencing something of a renaissance, and rail remains the most efficient way of transporting bulk goods.
Rail pricing is generally 10 per cent below its key competitor, trucking, due to the lack of door-to-door delivery that trucks offer.
Union Pacific may also benefit from a number of structural problems facing the trucking industry, including driver shortages and significant wage inflation, forcing truck companies to increase prices.
This has, in turn, allowed the railroad operators to increase pricing but without the equivalent increase in costs, and Union Pacific has concurrently been investing to make its network more efficient.
The company benefits from having very long tracks with far fewer stops than peers which, on the whole, operate in smaller geographic regions. This enables Union Pacific’s trains to run faster and ultimately earn a higher return on the company’s assets.
Our US analysts think that this blend of pricing power and focus on efficiency will lead to significant cash flow growth and outperformance.
In conclusion, while we remain very much on the lookout for signs that there will be a change in the positive earnings trend, we continue to find good investment ideas and are happy to run our overweight equity position.
Alexandra Buchan is co-manager of the Waverton Portfolio fund
