Theme and Background
This chapter discusses how investors can remain rational during periods of sharp market volatility, avoiding panic selling at the bottom. The author notes that securities prices have experienced extreme fluctuations over the past few months (with "fluctuations" being a euphemism for "sharp declines"), and media information is often provided by individuals lacking economic training and should not be regarded as an accurate economic assessment.
Core Views
- Markets Are Not Efficient: The author strongly opposes the efficient market hypothesis, arguing that the internet bubble, the Great Recession, the flash crash, and recent volatility over the past 15 years have proven that markets are far from efficient.
- Contrarian Investing Is the Correct Strategy: Citing Warren Buffett's adage, "Be fearful when others are greedy, and greedy when others are fearful," the author believes that widespread fear in the current market makes greed a repeatedly validated investment strategy.
- Traditional Energy Companies Are Oversold: The sharp drop in oil prices has led to significant declines in the stock prices of traditional energy companies. The author argues that the market has severely overreacted, presenting substantial upside potential.
Key Arguments and Data
1. Schlumberger's Acquisition of Cameron International:
- On August 26, 2015, Schlumberger announced the acquisition of Cameron International for $12.7 billion.
- The acquisition premium was 56% (relative to the previous day's closing price), close to Cameron's all-time high.
- The author believes that Schlumberger, as the world's most efficiently managed oilfield services company, demonstrates strong confidence in the long-term value of traditional energy through this acquisition.
2. Valuation Comparison of Subsea 7:
- Schlumberger's acquisition of Cameron had a price-to-earnings (P/E) ratio exceeding 18x (based on trailing 12-month earnings).
- Subsea 7 currently trades at a P/E ratio of just over 3x (based on trailing 12-month earnings).
- The author considers this valuation gap "enormous," and it becomes even more pronounced when using "normalized" figures (i.e., excluding the impact of cyclical troughs).
3. Global Alliance Between OneSubsea and Subsea 7:
- In July 2015, OneSubsea (60% owned by Cameron, 40% by Schlumberger) signed a global non-consolidated alliance agreement with Subsea 7 to jointly develop deepwater and subsea production systems.
- The author views this as confirmation of Schlumberger's deep confidence in the growth prospects of the deepwater/subsea business (Subsea 7's core operations).
| Comparison Item |
Schlumberger's Acquisition of Cameron |
Subsea 7 Current Valuation |
| P/E Ratio (Based on Trailing 12-Month Earnings) |
Exceeds 18x |
Just over 3x |
| Acquisition Premium / Valuation Level |
56% premium, near all-time high |
Well below historical average |
| Author's Judgment |
Acquisition will deliver double-digit returns |
Current valuation offers "enormous upside potential" |
Companies/Assets Involved
- Schlumberger International: The world's largest oilfield services company, acquiring Cameron International for $12.7 billion at a 56% premium. The author views it as a "highly informed, intelligent participant," whose actions endorse the long-term value of traditional energy.
- Cameron International: The acquisition target, whose subsea business (OneSubsea) is a growth area valued by Schlumberger.
- Subsea 7: One of the author's core holdings. Currently trades at a P/E of just 3x, far below Schlumberger's 18x acquisition multiple for Cameron. The author believes it has the financial strength to make acquisitions when competitors face financial distress, enhancing profitability. Bullish.
- OneSubsea: A joint venture between Cameron and Schlumberger (Cameron 60%, Schlumberger 40%), which formed a global alliance with Subsea 7, further confirming the outlook for deepwater/subsea operations.
Investment Implications
- Contrarian Buying in Traditional Energy: The current market is panic-selling traditional energy companies due to the oil price crash. The author sees this as a classic opportunity to "be greedy when others are fearful." Investors should avoid selling at the bottom, turning paper fluctuations into actual losses.
- Focus on Subsea 7: Its valuation (3x P/E) stands in extreme contrast to the industry leader's acquisition valuation (18x), and its financial strength enables acquisitions during the industry downturn, offering substantial upside potential.
- Beware of Media Noise: Media information is often provided by individuals lacking economic training and should not serve as a basis for investment decisions. Instead, investors should focus on the actions of industry insiders (e.g., Schlumberger).