Sterne Agee recently noted that it believes non-conventional and deepwater drilling will rise steadily over the course of the next few years, and as a result of these expectations a number of deepwater drillers could benefit quite nicely. These names include, but may not be limited to, Halliburton (NYSE:HAL), Schlumberger (NYSE:SLB) Oceaneering (NYSE:OII) and Tetra Technologies (NYSE:TTI), and of those four names I wanted highlight a number of reasons why I'm staying long on shares of Halliburton.
#1 Recent Trend Behavior
On Friday, shares of HAL, which currently possess a market cap of $44.96 billion, a forward P/E ratio of 11.97, and a dividend yield of 1.19% ($0.60), settled at a price of $50.52/share. Based on their closing price of $50.52/share, shares of HAL are trading 0.89% above their 20-day simple moving average, 2.67% below their 50-day simple moving average and 8.40% above their 200-day simple moving average. These numbers indicate a short and long-term uptrend for the stock and a mid-term downtrend which generally signals a moderate buying mode for most near-term traders and many long-term investors.
If Halliburton can demonstrate an increase in its overall production as a direct result of both its non-conventional and deepwater drilling activity, I think both traders and investors will see a long-term improvement in the stock's trend behavior.
#2 Non-Conventional Drilling Expectations
Halliburton's non-conventional drilling operations are currently aimed at lowering the cost per boe by increasing its production through more efficient operations. For example, the company recently noted several increases in its production at the Bakken (+24%), Utica Shale (+27%), Cana Woodford (+22%), Niobara (+29%), Granite Wash (+22%), Barnett Combo (+67%) and Eagle Ford Shale (+43%) plays.
(Source: 2013 Analyst Day Presentation)
If the company can continue to demonstrate growth at each of the above mentioned sites by at least 5.5%-to-7.5% on an annualized basis and lower the costs associated with production over at least the next 12 months, I see no reason why the company's earnings estimates would not meet or even exceed FY 2014 estimates.
#3 Deepwater Drilling Expectations
Halliburton's deepwater drilling operations are currently aimed at meeting its 2010 commitment of growing at a rate that is 25% faster than the rest of the market. According to the company's most recent Analyst Day Presentation, the Deepwater Market's CAGR is expected to increase by an average of 11% between 2013 and 2018 which translates to an expected CAGR of 13.75% for Halliburton between 2013 and 2018.
(Source: 2013 Analyst Day Presentation)
If the company can continue to demonstrate an average CAGR of 13.25% between 2013 and 2018, I see no reason why both the company's earnings and revenues estimates would not meet or even exceed analysts' expectations over the next several years.
#4 5-Year Dividend Behavior
Since February 27, 2009, the company has increased its quarterly distribution twice in the last five years, with the most recent increase having taken place in December of 2013. The company's forward yield of 1.19% ($0.60) coupled with its ability to maintain its quarterly distribution over last five years make this particular oil and gas play a highly considerable option, especially for those who may be in the market for a moderately-yielding stream of quarterly income.
Risk Factors (Most Recent 10-K)
According to Halliburton's most recent 10-K, there are a number of risk factors investors should consider before establishing a position. These risk factors include but are not limited to:
#1 - Trends in oil and natural gas prices affect the level of exploration, development and production activity of Halliburton's customers and the demand for its services and products which could have a material adverse effect on its business, consolidated results of operations and consolidated financial condition.
#2 - Liability for cleanup costs, natural resource damages, and other damages arising as a result of environmental laws could be substantial and could have a material adverse effect on the company's liquidity, consolidated results of operations and consolidated financial condition.
#3 - Doing business with national oil companies exposes Halliburton to a greater risk of cost overruns, delays and project losses, as well as unsettled political conditions that can heighten these and a number of other risks.
For those of you who may be considering a position in Halliburton, I strongly recommend keeping a close eye on the company's Non-Conventional and Deepwater drilling performance, its dividend behavior and its ability to enhance shareholder value over the next 12-24 months as each of these factors could play a role in the company's long-term performance.
Disclosure: I am long HAL. 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.