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Shares of Halliburton (HAL) received some support last week after analysts at Jefferies (JEF) issued an upbeat research note on the prospects for the oilfield service company.

I agree with Jefferies that there could be more upside ahead if North American operations start to show some improvements, coupled with continued payouts to shareholders.

That being said, I would not initiate a long position at this moment. After seeing significant momentum already this year, I don't think the risk-reward is too compelling at the moment.

Jefferies Is Positive

Analyst Brad Handler raised his price target for Halliburton from $54 to $58, which suggests there is some 15% upside from current levels.

Handler sees Halliburton well positioned to benefit from US upstream spending growth in 2014. The firm can furthermore realize efficiencies growing in non-NAM while it can return cash to shareholders, according to Handler.

On the back of these developments, Handler is raising his earnings per share estimate for 2014's earnings from $4.30 per share to $4.55 per share.

Valuation

Halliburton ended its second quarter with $1.41 billion in cash and equivalents. Total debt stood at $4.82 billion, for a net debt position of around $3.41 billion.

Revenues for the first six months of the year came in at $14.3 billion, up 1.3% on the year before. Net earnings more than halved to $661 million as the company took a $1.00 billion charge related to the Macando incident. Adjusted for this, operating earnings came in around $1.3 billion.

At this pace, annual revenues could come in a round $29 billion, as annual earnings are seen around $3 billion.

Trading around $50 per share, the market values Halliburton at $46 billion. This values operating assets of the firm at roughly 1.6 times annual revenues and 15 times annual earnings.

Halliburton currently pays a quarterly dividend of $0.12 per share, for an annual dividend yield of 1.0%.

Some Historical Perspective

Investors in Halliburton have seen ups and downs over the past decade, but all of this was net positive. Shares rose from $15 in 2004 to $50 in 2008, to end that year around $15 per share again.

Shares did recover to levels in their fifties in 2011, to fall back to $25 in 2012. Shares have doubled again in the meantime, exchanging hands at $50 per share.

Between 2009 and 2012, Halliburton has nearly doubled its annual revenues to $28.5 billion. Net earnings rose by 130% in the meantime to $2.6 billion.

Investment Thesis

Shares of Halliburton have already seen a lot of upside this year, trading with year to date gains of 46% at the moment.

Following the second quarter earnings, Halliburton announced a $3.3 billion tender offer to repurchase 68.0 million shares at $48.50 per share back in August, effectively reducing the outstanding shares base by some 7.4%. This was followed by the good news that the investigation regarding the Deepwater Horizon disaster has been closed, prompting Halliburton to pay a fine of merely $200,000.

The US, remains the most important business for Halliburton, making up roughly 50% of total revenues and two-thirds of operating profits. Yet, the business saw a 8% fall in second quarter revenues compared to a year earlier. Fortunately all other geographic areas stepped up as the company saw solid growth in Latin America, Europe & the Middle-East, as well as Asia.

While completion and production revenues fell by 3.3% to $8.5 billion in the second quarter, revenues at the drilling and evaluation business rose by 8.9% to $5.8 billion. While rig productivity is still under pressure in North America, revenues from servicing these continued more complex rigs becomes more and more lucrative.

Back in October of last year, I last took a look at Halliburton's prospects. I concluded that Halliburton and its competitors were suffering from overcapacity in the natural gas market, causing pressure on drilling activity at the time. As raw material costs were on the rise, Halliburton's earnings were getting squeezed from two sides.

I concluded that Halliburton was my favorite oil and gas supplier. At the time the valuation multiples looked fair on both absolute and relative terms, while Halliburton has a relative modest net debt position at the time.

After the solid returns so far this year, I am a bit more cautious. The continued growth in international operations and shareholder friendly strategies leave a bit more potential when the so important North American operations pick up steam again. As such the long term prospects continue to look good.

I suspects that shares could to re-test their all time highs around $57 per share in 2011, if North American operations show some improvements. This should be supported by Halliburton continuing to return cash to its shareholders at an aggressive pace, mainly through share buybacks.

Unlike Jefferies, I would be a bit more cautious. I see potential upside as well, but don't think the upside is compelling enough for me to initiate a long position at these levels, after seeing significant momentum in recent times.

I remain on the sidelines.

Source: Halliburton - Unlike Jefferies, I Don't See Compelling Upside