Should we Follow Tweedy Browne Into This Oilfield Service Stock?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Tweedy Browne, with more than $3.43 billion assets under management, is one of the most respected investment managers in the US. In the fourth quarter of 2012, it bought shares of Halliburton Company (NYSE: HAL), an oilfield service company. As of December 2012, it had more than 4.64 million shares in the company, accounting for 4.7% of its total portfolio. Let’s take a closer look to see whether or not we should follow Tweedy Browne into Halliburton.

Business snapshot

Halliburton, founded in 1919, is the leading provider of oilfield services to major oil and gas companies globally, with two main business segments: Completion and Production segment, and Drilling and Evaluation segment. The company is considered the world’s biggest provider of hydraulic-fracturing services. In the past year, Halliburton has benefited from a fast growing demand in the pressure-pumping market in North America. Furthermore, in order to significantly reduce its carbon emission and safety concerns, the company has been offering customers a new kind of fracking fluid that uses only food-industry ingredients.

$17.38 billion, or 61% of total revenue, was generated from the Completion and Production segment, while the Drilling and Evaluation segment had around $11.12 billion in total revenue in 2012. The operating income of the Completion and Production segment was $3.14 billion, whereas Drilling and Evaluation generated nearly $1.68 billion in 2012 operating income. Halliburton maintained a diverse customer base as no single customers have accounted for more than 10% of its total consolidated revenue for the last 3 years.

A good growth company with a conservative balance sheet

Over the past five years, Halliburton has experienced decent growth in both its top line and bottom line. The revenue has increased from $18.28 billion in 2008 to $28.5 billion in 2012 while the EPS has risen from $1.70 to $2.84 in the same period. In addition, the operating cash flow has gone up consistently, from $2.67 billion to $3.65 billion. However, the free cash flow has fluctuated quite widely, in the range of $88 - $542 million. Investors might feel comfortable with the company’s conservative capital structure. As of December 2012, it had $15.67 billion in total stockholders’ equity, $2.48 billion in cash and only $4.8 billion in long-term debt. 

Peer Comparison

With the current trading price of $41.50 per share, Halliburton is worth $38.52 billion on the market. The market is valuing Halliburton at nearly 6.7 times EV/EBITDA. Compared to its peers including Baker Hughes (NYSE: BHI) and Schlumberger (NYSE: SLB), Halliburton could be considered to be a bargain. At a trading price of $44.80 per share, Baker Hughes has $19.70 billion in total market cap. It is valued at only 6.25 times EV/EBITDA, the cheapest valuation among the three. Schlumberger is the largest company with $103.4 billion market cap. At the trading price of $77.85 per share, Schlumberger is valued the most expensive at 9.9 times EV/EBITDA. Schlumberger seems to be worth the highest valuation as it generated the highest operating margin at 18%. Baker Hughes had the lowest operating margin at 11% while Halliburton's operating margin was 16%. Thus, Halliburton's operating margin was 12.5% lower than that of Schlumberger but Halliburton's EV multiple valuation is 50% cheaper than Schlumberger's valuation. 

Foolish bottom line

Quantitatively speaking, Halliburton seems to be a bargain. However, the fracking boom might not continue to grow forever. It is hard to predict whether or not the fracking business would experience a significant growth or a slowdown in this year. Taking that unpredictability into account, I would prefer to see a much cheaper valuation before I get interested in investing in Halliburton.  


hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends 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!

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