Is Halliburton Hurting?

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There's plenty of companies that have a poor reputation on the best of days: Comcast, Bank of America, and British Petroleum all have massive revenue streams despite having some of the worst PR or customer satisfaction rates in all the industry.  Some companies thrive due to lack of competition (most notably Comcast, who targets rural areas with few, if any, alternatives for their second-tier Internet service) and others thrive thanks to a dedicated customer group that sticks with the devil they know.  Halliburton is one such company with a sputtering reputation, one dragged through the dirt during the Bush Administration's no-bid contract scandals and the blackouts of 2001.  You can expect an oil firm's stock price to closely match the price of oil itself, but Halliburton stock (HAL on the NYSE, trading for $37.80 a share) has jumped all over the place in the past five years, with three separate peaks and lows that saw value change by as much as 100% in just 12 months.  With an earnings report coming at the end of the month, it's worth asking if there's any hope on the horizon for the oil conglomerate.

Petroleum Problems

Turbulence has defined the oil market in 2015 (better than outright decline, which defined the market in 2014) with a 20% decline overall.  Domestic oil producers haven't added any net rigs, with the total number of rotary rigs falling from almost 900 to just 838.  Besides a brief but significant spike in the price of oil during August, no month in 2015 has seen any net gain in oil prices.  Halliburton, as such, is operating under a tight market, one that has forced a number of their competitors to slash operating costs; Chevron alone cut 1500 jobs and a billion dollars in expenses to maintain profit margins through 2015.  Yet the cost of oil alone doesn't determine the performance of energy companies and the criticism of Halliburton lies in the company's business practices just as much as the cost of their product.

Numbers Games

Halliburton has a number of markets across the globe but depends on domestic sales to a larger degree than international sales.  The first quarter of 2015 saw the company make over 50% of revenue from domestic markets, but that figure fell to just over a third in the second quarter of 2015.  The same downturn hit Middle East, African, and Latin American markets, though to a lesser margin, with only the European markets staying steady at null gain.  The company blamed the downturn on a 40% overall drop in rig numbers but spun it as a success with "only" a 25% downturn in sales.  That kept their earnings from dropping severely, dipping by only a nickel per share on a quarter-to-quarter basis through 2015.  This suggests several factors both complimentary and derivative: the company's management has done quite well at controlling costs and delivering higher margins, but hasn't been able to overcome the headwinds of oil prices and rig count.  A conference call by Halliburton CFO in July announced the likelihood of "revenues and margins under pressure" for the third quarter with a single-digit decline in revenue.  The forecast appears to have proven mostly correct: third-quarter projections put revenue falling at just under five percent, accounting to over five billion dollars in total. 

Mergers and Markets

One of the saving graces for Halliburton is the high likelihood of a merger rival energy concern Baker Hughes.  While both companies appear to be amicable towards the merger, regulators have put pressure on the original structure of the agreement.  The deal at present comes with a price tag of $28 billion and has sent prices of shares of Baker Hughes (BHI on the NYSE, trading for $53.81 a share) upwards despite the low cost of oil and gas, but difficulty pushing the merger through antitrust regulation will delay the merger until at least 2016. Halliburton needs to prove to the public that the merger isn't affected by divestitures as the larger company loses value at the same time that Baker Hughes is enjoying a surge on the market.  While Halliburton has announced time and time again that the purpose of the merger is to save about two billion dollars in operational expenses, too many investors have hopped ship, making it an uphill battle for all parties.

  • The Takeaway: there's not much to like about Halliburton stock at the moment.  Since the current price is higher than the 52-week low, there's not much value to be had by buying the stock with long-term expectations.  Likewise, the growth prospects depend on a resurgence of oil, a prospect that appears to be too far away from the here and now to be a viable investment option.  Investors should look at Halliburton as an engine for short-selling, since the difficulties in the merger process in tandem with the ongoing slowdown in shale oil fracking will push the stock price downward for at least the next six months.
  • The only competitor of Halliburton who enjoys a strong Morningstar rating is Schlumberger LTD (SLB on the NYSE, trading for $74.50 a share), yet their stock has gone down steadily for the last three years.  Investors with an appetite for risk can pick up Schlumberger as a value buy, but will have to wait at least 12 months to see the investment gain any value.  Few oil developers are in a strong position at the moment, but Schlumberger has a decent price/sales ratio at 2.1 and a healthy price-earnings ratio of 22.8.  With a 2.6% dividend yield, furthermore, they're expected to deliver more to investors than Halliburton.

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