Tuesday, October 12, 2010

Market Yawns at Schlumberger News

A favorite topic of mine is reputational harm and the FCPA, more specifically stock price movement, if any, based on FCPA news and events. (See here for a previous post.

So what happens when a major company is the feature of a front-page Wall Street Journal article about a previously undisclosed FCPA inquiry.

The short answer is not much and on the day of the news the company's shares rise and the market yawns.

Last Friday, Dionne Searcey and Margart Coker of the Wall Street Journal revealed that the "Justice Department has begun looking into allegations of possible bribery in Yemen several years ago by Schlumberger Ltd., the large oil services company." (see here). According to the article, "the allegations concern contract payments Schlumberger made to a consulting firm with ties to Yemen's government at a time when Schlumberger sought approval to create an oil-exploration databank in Yemen." The article identifies the consulting firm as Zonic Invest Ltd. and indicates that the general director of the firm was the nephew of the Yemeni President. According to the article , Yemen's Petroleum Exploration and Production Authority, before signing off on the relevant project, "urged the company" to hire Zonic and Schlumberger agreed to "hire Zonic and pay it a $500,000 signing bonus, and the project went forward." The article also indicates that Schlumberger paid Zonic for other services that "were done at above-market rates or were unnecessary." According to the article, the "investigation is at an early stage" and "investigators have been in touch with former Schlumberger employees who say they have knowledge of internal allegations made at the company, and of internal Schlumberger probes of those allegations." According to the article "Schlumberger compliance officers became aware of the matter in 2008 and carried out investigations." The article states that "Schlumberger's legal team eventually determined no one had violated its anticorruption policy" and that the internal investigation "ended without any significant disciplinary action."

Did the front-page Wall Street Journal story affect Schlumberger's stock? Apparently not. The stock closed on Friday up approximately .5% from the previous day's close.

Were investors and analysts rattled?


Matthew Conlan (Wells Fargo Securities, LLC) wrote: "Our take: $1.38 million is a very small amount for an $86B market cap company, so the total penalty for this issue is likely to be insignificant to the investment case." "We don't see a significant economic impact from this specific investigation."

Stephen Gengaro (Jefferies' Equity Research) wrote: "We would remind investors that [Schlumberger] is the largest oil service company in the world, with the most diverse product mix, best [return on invested capital] among its peers, and most importantly a balance sheet loaded with $3.1 billion in cash and short-term investments that could easily dispose of any pending fine."

Tudor, Pickering, Holt & Co. Securities, Inc. wrote that the Wall Street Journal headline is "never positive, but we're not overly concerned given [Schlumberger's] size and recent peer settlements (small $) maintain buy."

See also, Ryan Dezember - "Analysts Unfazed by Justice Dept. Probe On Schlumberger" - Dow Jones (here).

Yesterday at the Motley Fool, David Lee Smith wrote, under the title "DOJ Probe or Not, Schlumberger's a Keeper" (here) "I'm not inclined [to] start sweating about a still early stage Justice Department look into Schlumberger's activities in Yemen." "I'd still label the company a consummate keeper."

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