Uncle HAL: A Bargain for Long-Term Investors

There is no doubt about it: Halliburton (HAL) has taken a beating in the last few months. In late August this oilfield services giant traded for about $45 but due to falling oil prices and an expected fall in North American drilling demand, HAL now trades for only about $19.

Now there are tons of reasons to be bearish about the oil services industry right now. The drop in crude will undoubtedly lower demand for HAL's product as oil exploration companies will spend less money on drilling. The global slowdown and OPEC's inability to stop falling oil prices are also worrisome for HAL. But I think this has all been priced into HAL and despite these risks I still see upside to old uncle HAL, especially if you have a long enough investment horizon.

Overview

Halliburton is headquartered in Dubai and has operations in over 70 countries. In 2007, HAL had revenues of $15.3 billion and operating income of $3.5 billion. According to its 2007 report, the company generates 45% of its revenue (40% of its profit) from 'Drilling and Evaluation' and 55% of its revenue (60%of its profit) from 'Completion and Production'. It is also important to note that 45% of its overall revenue comes from the US.

The Bullish Case for HAL

It's cheap, granted for a reason, but it's still cheap. Falling oil prices, less drilling, potential terrorist threats, low capital expenditures from US oil companies, yes – But HAL is still trading for about 6.5 times next year's earnings ($18.6/$2.85).

Halliburton also has $1.2 billion of credit it can draw upon until July 2012. With a ROE for 35% and a safe LTD/cap of 27%, I think HAL is in a good position to benefit from the long term growth in oil demand.  The recession will not last forever, China, India and the rest of the world are going to come back thirstier than ever for the black crack.

Conclusion

In conclusion, I think HAL is a great 401(k) stock. The world is not going to stop needing new sources of oil, especially since 70% of current production comes from mature fields. I would take this drop in HAL's price and add some HAL to your portfolio at current bargain basement prices of 6.5 times next year's earnings.

Disclosures: None

Comments

[awq:]

DS..........re: HAL...........you make no mention of the political situation and the possibility that the jerks in congress may penalize HAL. Main reasons / relationship with Cheney, involvement in Iraq, Dubai,
offshore tax status,and other items that they will pull out of a hat as they move along.........??????

2008 Oct 27 12:11 PM

[anarchist:]

The bastards should be penalized for all of the above reason!

2008 Oct 27 09:01 PM

[Steven Ward:]

HAL suffers from too much political work and now will sufffer from Congressional investigations which the Dems love to do.
Dubai by the way has a weak extradition treaty with the US. Gee whiz, maybe we should all move our HQ's there. You know, just like Michael Jackson.

2008 Oct 28 08:17 AM