Can This Oilfield Company Service Investors’ Portfolios?

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

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a great way to gain a detailed and thorough perspective on a company and its future. As the 2013 year begins its rollercoaster journey, I would like to pinpoint on a trailblazer in the oilfield services industry, Halliburton Company (NYSE: HAL).

Strengths:

  • Solid Revenue Growth: In 2006, Halliburton reported revenue of $22.58 billion; in 2011, the company announced revenue of $24.83 billion, representing a year over year annual growth rate of 1.92%; this trend of solid revenue growth is highly anticipated to accelerate into the future with projections placing 2015 revenue at $33.48 billion (this growth has been a result of an increasing amount of revenue per rig in all geographical regions of the company’s business)
  • Dividend: Currently, the company pays out quarterly dividends of $0.09, which annualized puts the dividend as yielding 0.99%
  • Institutional Vote of Confidence: 74.48% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors have in the company and its future
  • Reasonable Valuation: At the moment, Halliburton carries a price to earnings ratio of 11.58, a price to book ratio of 2.56, and a price to sales ratio of 1.37; all of which indicate a company trading with a reasonable valuation, providing investors with an attractive entry point
  • Double Digit Margin: Halliburton presently possesses a net profit margin of 12.10%, representing a strong and profitable company primed for growth into the future
  • Geographical Diversification of Business: Halliburton is has a substantial international presence, with its business being spread across the entire globe, and with this geographical diversification comes a greater level of predictability and certainty for investors
  • Cash & Equivalents: The company currently holds about $2.1 billion of cash and cash equivalents on their balance sheets, a major strength in the business which could allow the company to reinvest into itself or raise their dividend  

Weaknesses:

  • Debt: Halliburton presently holds about $6.2 billion of debt on their balance sheets, a major weakness in the business, as this debt load outweighs its stash of cash
  • Margin Compression: In 2007, the company reported a net margin of 22.9%; in 2011, the company announced a net margin of 11.4%; this trend of margin compression is a troubling sign of a withering business losing its pricing power, and this trend is only expected to sustain into the future, with projections placing 2012 net margins at 9.1%
  • Vulnerability to Environmental Issues: Oil companies and oil field service companies are notorious for their consistent environmental mishaps, from the Exxon Valdez oil spill to the BP Deepwater Horizon spill, and these disasters are not only harmful to the environment but also to the company’s profits as massive fines often follow shortly after the occurrence
  • Relatively High Volatility: Halliburton presently carries a beta ratio of 1.56, indicating a company which trades with greater volatilely than the overall market, a major weaknesses for investors

Opportunities:

  • Dividend Growth: Since implanting their dividend program in 1947, Halliburton has consistently raised their dividend payouts, and this trend is widely anticipated to continue into the future
  • Growth in Revenue per Rig: Arguably the most important metric in Halliburton’s business is the amount of revenue the company derives from each rig it services, and over the past years this metric has increased across all the company geographical segments, most notably in its North American segment, from $3.69 million per rig in 2008 to $6.46 million per rig currently; and further growth in this metric could provide huge opportunity for the company and its shareholders
  • Acquisitions: In August 2012, Halliburton acquired Petris Technology Incorporated, and further acquisitions in the future could introduce new technologies to the company and provide Halliburton with a technological advantage over its competitors
  • Increase in Energy Demand: The global demand for energy has exponentially grown over the past years, and further growth in energy demand is inevitable, and with this growth comes the opportunity for Halliburton to meet that rising demand

Threats:

  • Competition: The oilfield service industry is extremely competitive, and the competition to offer the best product for the least amount of money can lead to margin compression
  • Government Regulation: Any government regulation that restricts the expansion of the oil industry could directly hamper Halliburton’s growth as the companies Halliburton services are held in a headlock
  • Decline in Oil Prices: If oil prices were to weaken, the companies that pay millions to Halliburton would hesitate, as at a certain level the endeavor is simply not profitable

Competition:

Major publically traded competitors of Halliburton include Baker Hughes Incorporated (NYSE: BHI), Weatherford International Limited (NYSE: WFT), Schlumberger Limited (NYSE: SLB), and RPC Incorporated (NYSE: RES). All of these companies operate in the oilfield service industry, and compete with Halliburton. Baker Hughes is valued at $18.62 billion, pays out a dividend yielding 1.42%, and carries a price to earnings ratio of 13.48. Weatherford is valued at $8.78 billion, does not pay out a dividend, and carries a negative price to earnings ratio. Schlumberger is valued at $96.26 billon, pays out a dividend yielding 1.52%, and carries a price to earnings ratio of 17.73. RPC is valued at $2.91 billion, pays out a dividend yielding 2.42%, and carries a price to earnings ratio of 9.80.    

The Foolish Bottom Line:

Financially, Halliburton is relatively solid. The company possesses solid revenue growth, a reasonably sized dividend, and a decent dividend. However, the company has recently been experiencing margin compression and carries a debt load that significantly outweighs its cash reserve. Into the future, Halliburton’s outlook is packed to the brim with substantial opportunity, most notably due to the continuation of growth in global energy demand. All in all, while Halliburton is relatively volatile due to its strong link to the price of oil, which can turn on a dime, over the long term Halliburton is a solid investment, primed for growth in waves of major rise and declines.  


makinmoney2424 has no position in any stocks mentioned. The Motley Fool recommends Halliburton Company. The Motley Fool owns shares of 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!

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