Halliburton Leads Oil Services With Technology
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the price of oil fluctuates and the role of oil plays a central part in the U.S. Presidential campaigns, oil service stocks have been generally overlooked. While many of the largest players look very attractive at current levels – including Schlumberger (NYSE: SLB) and Baker Hughes International (NYSE: BHI) – Halliburton (NYSE: HAL) rises to the top of the pack based on the strength of its technology. Not only did the company recently announce the opening its Advanced Perforating Flow Lab, its advances in fracking with PermStim add to the company’s superior metrics to make this stock a buy for your core portfolio.
While you may not hear “oil services” and immediately think of cutting edge technology, in Halliburton’s case, that is exactly what you are investing in. The company has already taken a leadership role in offering its customers an integrated solution to improve well performance and streamline services. The opening of the Advanced Perforating Flow Lab will allow the company’s customers to recreate a wide array of real world reservoir conditions, thus allowing for enhanced design and better-informed decision making.
The new lab includes an integrated command center, four testing locations, a lab for core preparation and a complete core analysis lab used to interpret results. A recent piece details some of the facilities most critical technology:
flow vessels with the ability to conduct tests that simulate downhole reservoir conditions, including pressures and temperatures with a maximum rating of 50,000 psi and 400°F; test vessels with the ability to rotate 180 degrees to perform gravity-related sanding studies; and a perforated core analysis laboratory that utilizes the latest computed tomography (CT) imaging technology to evaluate perforator performance and reservoir inflow.
What all of this translates to for Halliburton and its customers is an additional resource that has the potential to significantly improve the decision-making process. Particularly under the continued stringency of regulators since the BP (NYSE: BP) spill, the ability to run these simulations could prove invaluable. The relationship between BP and many of the companies in the oil service industry have come under careful scrutiny, only having been recently eased.
Under the typical procedure, when a well is exposed to hydraulic fracturing in order to retrieve oil and natural gas, it is filled with a natural substance called guar bean. The price of this resource has risen dramatically over the course of the year, roughly doubling in the last three months. As a critical component of fracking, the price of guar bean directly impacts the cost of the overall operation. In order to address this cost, Halliburton has developed a synthetic substitute called PermStim, which has proved viable. The use of PermStim should allow the company to operate at a significant cost advantage, allowing it to gain an important edge.
By the Numbers
The three statistics that I often find the most compelling, particularly in tandem are the price-to-equity ratio, the PEG ratio and the operating margin. Halliburton excels in each relative to its two major peers, making it look even more attractive. The stock is trading at a multiple of 10.49 relative to 10.54 for Baker Hughes and 17.66 for Schlumberger, a PEG of 0.71 relative to 0.77 for Baker Hughes and 0.93 for Schlumberger, and an operating margin of 18% relative to 14% for Baker Hughes and 17% for Schlumberger. What these combined metrics suggest is that the company is being very efficiently run, while still offering a solid value both with and without growth being taken into account.
All three companies do offer a dividend, ranging from 1.1% to 1.5% with Halliburton at the low-end and Schlumberger on top, but in all cases the dividend is a sweetener, not an outright basis to buy the stock. While all three look attractive at current levels, making oil services one of the more appealing sectors, Halliburton looks the strongest on positive technology catalysts. Given this strength, the stock is a buy for your core portfolio.
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. 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.