What Will Pump Some Life Into Halliburton’s Stock?

By Ryan Guenette - September 6, 2012 | Tickers: BHI, HAL, RES, SLB, WFT | 0 Comments

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Over the past year Halliburton (NYSE: HAL) has declined 19.18%, immensely underperforming the S&P 500, which has rallied 19.85% during this period. Halliburton is an oilfield services company. The company is a provider of services and products to the energy industry engaged in the exploration, development, and production of natural gas and oil. Serving national and independent oil and natural gas companies, Halliburton operates in 80 countries around the world. The company derives the majority of its revenue from the United States, but stretches around the entire world. The company employs 68,000, and is valued at $31.09 billion on the New York Stock Exchange. After reporting results that topped analyst estimates, the stock rallied extensively, bouncing off multi-year lows. So, what will pump some life into Halliburton’s stock?

Liquescent Fundamentals

In 2001, Halliburton reported earnings per share of $0.93. In 2011, the company stated that it had derived $3.08 per share from its business operations. This represents a 231.18% increase in earnings over the course of a decade. Based on these statistics, Halliburton’s compound annual growth rate (CAGR) is 12.71%. This rate is accelerated for a company of such magnitude, yet forward looking estimates displays earnings continuing to grow around this double digit clip. Halliburton’s growth should act as a catalyst for the stock in the coming years. Additionally, the company pays out a meager dividend, which is nothing more than a little something extra. Currently, Halliburton pays out an annual dividend of $0.36, which at the current price, puts the dividend as yielding 1.07%. This dividend has remained steady since 2008, and should continue to act as constant in the future. From this we can see Halliburton’s long-term financial strength, annualized double digit growth rate, and decent dividend.

The chart below displays Halliburton’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

Breaking the Industry Down

Oilfield and natural gas service companies do not make more money when prices rise, and lose money when prices go down, yet the profits of these companies are correlated with prices. Service companies make money based on the volume of oil or gas processed, which its services were applied to. Their expertise allows companies to find and derive oil and gas from their properties. When oil and gas prices are higher, companies are more motivated to turn to Halliburton to derive their resources from their property. Since 1970, crude oil production has been falling, yet a recent pickup in production could play into Halliburton’s court. The chart below displays the recent pickup in production.

However oil has not been the true drag on Halliburton’s business. Natural gas prices have drifted to such historical lows that the owners of the properties no longer find it financially attractive to pay Halliburton or other oilfield companies to get it out of the ground, as it would cost more to get it out of the ground than it is worth. If natural gas prices are able to rebound, and put together a long-term upward move, Halliburton’s business will drastically improve. As the chart below displays, the natural gas prices appear to be in the bottoming process.

Who Is The Industry Trailblazers?

Compared to some of Halliburton’s most prominent competitors, such as: Baker Hughes (NYSE: BHI), Schlumberger (NYSE: SLB), Weatherford (NYSE: WFT), and RPC (NYSE: RES), Halliburton compares relatively favorably.

In terms of growth, RPC is the industry leader, while Schlumberger is the industry laggard. All companies except for Weatherford pay out dividends, with RPC possessing the largest and fastest growing dividend. In the fundamental ratio comparison, RPC appears to be the bargain, while Weatherford appears to be trading at a premium to its peers. The opposite is true when growth is taken into account. In the net profit margin comparison, RPC stands out to the upside, while Weatherford stands out to the downside.

The Foolish Bottom Line

The past year has been a rough one for Halliburton. However the decline in this quality company has resulted in a stock with strong long-term fundamentals and a price to earnings ratio below 10. The company has an annualized double digit growth rate, which should continue into the future, and a decent dividend. If oil prices are able to remain steady, and natural gas prices are able to build a bottom, and eventually grow at a sustainable rate, Halliburton will experience significant growth. Compared to its competitors, the company relates moderately favorably. If an investor believes that natural gas prices will eventually rebound, than Halliburton is an incredible investment at a historically low multiple.     

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