Halliburton Is a Buy as Oil Services Heat Up
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As various global macroeconomic events continue to drive the commodities markets, the oil services sector seems to have been largely overlooked by investors. While top names like Halliburton (NYSE: HAL), Schlumberger (NYSE: SLB) and Baker Hughes International (NYSE: BHI) all have appealing attributes at current levels, Halliburton rises to the top as the preferred name amongst these three stocks, each of which I would be happy to own. Based largely on significant upside created by a depressed valuation, Halliburton should be added to your core portfolio at current levels.
While oil services might not seem like a technology driven business at initial glance, innovation and advances are critical to the success of each of these companies. Halliburton currently holds roughly 2900 patents, while Baker Hughes has 3200 and Schlumberger nearly 4000. Furthermore, companies in this space spend huge amounts on research and development (R&D) in order to keep up with competitors. Schlumberger spent nearly $1 billion on R&D last year, while Baker Hughes spent $462 million and Weatherford International (NYSE: WFT) spent just under a quarter-billion. Weaker fundamental metrics leave Weatherford out of consideration herein, but the sector continues to look strong.
Some key areas of development in oil services include reservoir characterization and drilling technology. The former utilizes high-end seismic, wireline and well testing to allow companies to better understand the dynamics of their reservoirs. Both Halliburton and Schlumberger excel in this area. As some evidence of the importance of drill technology, Schlumberger recently acquired Smith International for $11 billion to secure its drill-bit dominance.
The above factors aside, one of the biggest advances in oil services lately has been Halliburton’s invention of PermStim. When a well is fracked to recover oil and gas, the process of hydraulic fracturing requires the use of a material called guar bean to fill the well. The price of this natural resource has doubled in cost over the last three month due to diminishing supply. PermStim is a viable substitute that will allow Halliburton to complete the fracking process for a greatly reduced price. This type of advantage should give the company a significant edge moving forward.
By the Numbers
On a valuation basis, the fundamentals for each of these three companies are very tight. Halliburton is trading at a trailing P/E of 11.7 relative to 12 for Baker Hughes and 19.3 for Schlumberger. The PEG ratios for the three companies are 0.77, 0.73 and 0.82 respectively; all very attractive pricing for the expected growth in each company. Halliburton boasts an operating margin of 18% relative to 14% for Baker Hughes and 17% for Schlumberger. Lastly, Halliburton reported year-over-year revenue growth of 22% relative to 12% for Baker Hughes and 16% for Schlumberger.
While all three of these companies are tightly clustered in terms of these metrics, the internals of Halliburton’s financials add to the company’s appeal. Halliburton, like most oil service companies, saw a decrease in North American revenue, largely as a result of much lower prices for natural gas. The lower commodity price hurt the sector’s pricing power and led to the revenue decline. The year-over-year revenue growth mentioned above was achieved in spite of the fact that 57% of the company’s business is North American based. Growth in Latin America, Europe and the Middle East was sufficient to more than offset the decline. The company’s ability to successfully navigate in a shifting global environment is a big plus for the stock.
While some investors continue to have concerns over Halliburton’s role in the Gulf and the response of regulators in that region, the global position of the company remains strong. The totality of available information suggests that Halliburton played no major role in the Gulf spill, but some downside for this event is already built into the stock. Ultimately, the strong valuation combined with improving technology makes Halliburton a great candidate for your portfolio. While Schlumberger and Baker Hughes both look solid, Halliburton is the strongest name in the space.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company and Schlumberger. 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.If you have questions about this post or the Fool’s blog network, click here for information.