Preparing for Giant Oil & Gas Player's Earnings Release
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The earnings season is on a go and Halliburton (NYSE: HAL), the giant Oil & Gas equipment service provider, is expected to report on Jan. 25 before the market opens. On one hand, I have been hearing that the North American market is ready to see a turnaround and will soon find a bottom. On the other hand, the bears believe this is not true. Given that the company’s performance is extremely sensitive to North American (NAM) natural gas and pressure-pumping markets, it is extremely important to be clear on this viewpoint before investing in this company.
The investment case
With North America (NAM) margins potentially finding a bottom, international chugging higher, and a ~10.5x multiple that remains well below its 5-year average, we view Halliburton as among the most compelling valuations in the group. While a further NAM slide in 4Q is likely, I expect 2013 Exploration & Production budgets to match or surpass 2012 levels while recent transitory headwinds dissipate. Internationally, volumes are accelerating and margins are expected to improve again in 2013. As the market gains comfort that NAM margins are bottoming, the international upcycle continues, and the company potentially settles its Macondo legal battle, I expect Halliburton to be a relative outperformer.
The business drivers
In North America, Halliburton has the dominant oil service franchise. Despite the recent stalling in U.S. activity and the current oversupply of pressure pumping equipment in the market, HAL’s position leaves the company better positioned to weather the downturn and potentially take share as well. In addition, several 2012 headwinds, such as guar pricing, could become tailwinds in 2013.
Internationally, while still a distant No. 2 to Schlumberger (NYSE: SLB), Haliburton has been taking share in several markets such as Brazil and exhibiting the fastest growth among the Big Four in recent quarters. With little-to-no service capacity abroad, pricing is improving, albeit at a gradual pace. As Halliburton executes internationally and as that business becomes a larger share of earnings (nearing 50% in 2013), the market is expected to place a higher value on HAL’s international earnings.
With falling capex needs and a considerable cash pile poised to build further in 2013, the Street is increasingly optimistic about Halliburton returning more cash to shareholders via dividend hikes or buybacks. A resolution on Halliburton’s Macondo liability could accelerate this process.
As already stated, HAL definitely trades at cheaper multiples to its peers. Schlumberger recently announced its earnings in which it topped both the revenue as well as the earnings estimate. This has sent bullish signals to the Oil & Gas sector investors. Schlumberger is currently trading at a forward P/E multiple of 16x. Also, its EV/EBITDA multiple for 2013 is 8.4x.
Similarly, HAL’s peer Baker Hughes (NYSE: BHI) is trading a forward P/E multiple of 11x and a forward EV/EBITDA multiple of 5x. This company has a broad international presence. In fact, political conditions in South America, Africa and Russia are a big source of risk to the company’s valuations and estimates.
In comparison, HAL currently trades at a forward P/E multiple of 10x (below the median group P/E multiple of 20x) and an EV/EBITDA multiple of 5x (below the median group multiple of 10x).
In a more robust North American environment (aided by a stronger natural gas price) and assuming a more accelerated pickup in international spending, Halliburton’s EPS could reach $3.70 to $4.00 in 2013. The upside scenario of $63 assumes an earnings power of $3.85 on a multiple of 16.5x. On the other hand, a stalling of the global economy or geopolitical issues could have a negative impact on demand for oil and gas, and consequently oil services. Under this scenario, the EPS for Halliburton could be $2.70 to $2.90 in 2013. This assumes an 8x multiple.
With cheap multiples and 30% potential upside to the current price, Halliburton seems to be one of the most attractive stocks in the group. The stock’s current forward multiple is below its 5-year average of roughly 13.5x. Halliburton’s multiple is expected to expand as market pessimism regarding the uncertainty over North American margins abates, the company potentially settles its legal battle with BP regarding the Macondo incident, and international margins continue to trend higher.
AnalystX has no position in any stocks mentioned. The Motley Fool recommends Halliburton. The Motley Fool owns shares of Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!