Halliburton Lucky To Get Away Lightly In Oil Spill Disaster

Jul.30.13 | About: Halliburton Company (HAL)

Halliburton's criminal plea agreement

Halliburton Co. (NYSE:HAL) has entered into a criminal plea agreement with the Department of Justice regarding the 2010 Deepwater oil spill in the Gulf of Mexico, which killed 11 people and deposited nearly 5 million barrels of oil offshore causing extensive environmental damage. The company had earlier sworn by its innocence but has now conceded that employees tampered with computer simulations that could damage the company's case. Investors did not seem to be bothered by the admission and the stock ended up on the announcement of a share buyback worth $3.3 billion. Under the agreement, Halliburton will pay $200,000, which is the maximum fine for a misdemeanor and $55 million to the National Fish and Wildlife Foundation, but the latter payment could be tax deductible because it will be made to a nonprofit organization. The employee who directed the evidence tampering will remain anonymous and continue to work for the company. Justice will not pursue any charges other than the misdemeanor in exchange for cooperation. The fine of $200,000 is equivalent to a few minutes' revenue for the company and minuscule compared to what TransOcean (NYSE:RIG) and BP (NYSE:BP) had to pay. Halliburton can consider itself extremely fortunate to get away with so little.

The consequences of the agreement

The agreement does not provide the company with any protection from the pending decision by a Federal judge on how much the companies involved in the spill should pay as damages in the civil cases involved. How much each company will pay will be determined by the amount of blame that the judge chooses to assign. Halliburton can take a chance on getting a favorable ruling or it can avoid the risk and uncertainty by settling with the team of attorneys representing the many people and businesses claiming damages because of the spill. In fact, the criminal plea agreement will put Halliburton under pressure to complete the settlement before the ruling is issued.

Second quarter 2013 results

Declines in North American revenues caused second-quarter profits to decline by 8% but growth internationally helped the company to come out ahead of the expectations on Wall Street. The company helps energy producers to produce oil and natural gas offshore and on land. In the last few quarters, domestic oil drilling in the United States has had the highest activity levels in more than 20 years, but an oversupply of natural gas has hit the company's gas business. Growth has slowed down but Halliburton hopes that higher natural gas prices will translate into more business. Net income for the quarter was $679 million, which translates into an EPS of $0.73 compared with the analysts' expectations of $0.72 per share. In the same period of the previous year, the figures were $737 million and $0.79 per share. Revenues at $7.32 billion were also ahead of analysts' estimates and represents growth of 1% compared to $7.23 billion in the previous year period. The increase in revenues was primarily due to growth in Asia.

Revenues for the Completion and Production business segment were $4.36 billion a year-over-year decrease of 2.2%. However, the figure was 6.4% higher than the preceding quarter because of increased onshore activity in the U.S. and internationally. Operating income for the segment was $732 million, down 19.9% year-over-year, with North American profits plunging 25.2%. Revenues from another important segment, Drilling & Evaluation, were 6.5% higher than the second-quarter of 2012 level and also 2.8% higher than the preceding quarter at $2.95 billion as a result of increased activity in the eastern hemisphere. Income increased by 5.6% year-over-year and 2% over the preceding quarter.

Hydraulic fracturing or fracking, which is a major business for the company and involves using chemicals and water under high pressure to crack rock formations and extract hydrocarbons, has been criticized by environmentalists on the ground that it affects ground water. The company has attempted to defuse criticism by entering into a deal with Nuverra Environmental Solutions Inc. for the recycling of waste water. Preliminary results from a Federal study, which is the first objective look at the effect of fracking chemicals, found no evidence that these chemicals had contaminated drinking water aquifers at a site in Pennsylvania.

The bottom line

Halliburton can consider itself extremely lucky to get away so lightly in the settlement with the Justice Department even though it will still have to reckon with the civil proceedings. It is presently quoting at just under $46 compared to the mean target price of analysts of $54.24 and the median target price of $54.00. This means that there is a possible upside of almost 20% with little downside. HAL is definitely worth additional consideration in the Oil and Gas services sector.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.