Don't Ignore Halliburton
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Oil service firms play an important role in the world's energy economy by providing the tools and personal necessary to extract energy resources. With America's fracking boom and the growth of non-traditional fields beyond North America, U.S. oil service firms will have an important role to play over the coming decades. Production companies are always trying to increase efficiency and keep their wells in the black. National oil companies have sovereign rights to their fields, but many of these companies lack the expertise to develop their assets. Oil services firms help to keep private companies solvent and national oil companies develop their most challenging assets.
Halliburton (NYSE: HAL) is one of the biggest oil service firms, and it trades at a discount relative to SLB and BHI. As America continues to develop its shale resources Halliburton is also looking at shale plays in Latin America and China. Their lower P/E ratio is somewhat justified through their relativity low gross margin. Halliburton's EBIT margin and profit margin place them in the middle of the pack, below Schlumberger and above Baker Hughes. At the same time Halliburton's 5 year EPS growth and 5 year revenue growth are both positive and suggest that Halliburton's PE ratio of 10.3 may be a tad too cheap. For the past couple years their debt load has been decreasing, and now their total debt to equity ratio of .32 places them between Schlumberger and Baker Hughes. Halliburton's low P/E ratio and decades of experience in the industry make it an attractive investment with a solid economic moat as complex, non-traditional energy plays are developed throughout the world.
Schlumberger (NYSE: SLB) is a strong firm with the highest gross margins and profit margins of the group. Schlumberger is definitely not a growth stock, but their $93.5 billion dollar market cap makes them more stable than smaller firms. With the growth in deep water fields, Schlumberger is using their size to develop custom solutions to deal with the complexity of deeper offshore production. Schlumberger's free cash flow yield of 1.8% and return on assets of 9.4% is very encouraging, but their P/E ratio of 17.0 should make investors think twice. Halliburton is around a third the size of Schlumberger, and their lower P/E ratio of 10 gives the company much more room for appreciation.
Baker Hughes (NYSE: BHI) is another major oil services firm with a strong international presence. Over the past year they have seen a number of rotary rigs in the U.S. and Canada fall in the midst of low prices, while the number of international rigs has increased. Baker Hughes' return on equity of 8.4% and free cash flow yield of -6.7% are concerning, as they are both lower than the numbers posted by Schlumberger and Halliburton. Baker Hughes' EBIT margin of 10.6% is also the lowest in the group, but their P/E ratio of 13 is higher than Halliburton's. The major area where Baker Hughes beats Halliburton is in expected 2013 earnings growth rate of 9.9%, compared to Halliburton's 4.6%. With lower margins and a lower return on equity, Baker Hughes is best ignored for the time being.
While the oil majors get the majority of the media's attention, oil service firms are an integral and profitable part of the energy sector. Halliburton is a major company with decades of experience and a strong international reach. Their return on equity is higher than that of Schlumberger or Baker Hughes, while their P/E ratio of 10.3 is the lowest among the group. Given Halliburton's reasonable margins, strong return on equity, and low P/E ratio, it is a good investment at current prices.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company. 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!