Halliburton's (HAL) fourth quarter earnings report was not well-received by the market, despite the fact that both revenues and earnings beat consensus estimates.
While the company remains a well-led premium player within the long term growing oilfield service sector, I think shares are fully valued at this point in time.
Fourth Quarter Results
Halliburton generated fourth quarter revenues of $7.64 billion, up 4.8% on the year before. Revenues were up by 2.2% compared to the third quarter and comfortably beat consensus estimates at $7.55 billion.
Reported earnings rose by 18.3% to $795 million as reported earnings per share rose by fourteen cents to $0.93 per share. Earnings came in ahead of consensus estimates at $0.89 per share.
Looking Into More Detail
The completion and production business reported 4.7% growth, with revenues totaling $4.54 billion. This growth was accompanied by solid margin expansion with operating margins improving by nearly 3 full percent points to 16.8% of revenues. Growth was seen in all geographic regions, with North America still making up nearly two-thirds of total revenues within the segment.
The drilling and evaluation business reported revenues of $3.10 billion, up 4.2% on the year before. Margins were slightly under pressure, falling by 30 basis points to 16.1% of total revenues.
Earnings saw another boost on the back of lower tax rates, with the effective tax rate falling by 840 basis points to 25.8% of operating profits. On top of that came a reduction of roughly 8% of the outstanding share base over the past year, providing an additional boost to earnings per share.
2014 Should Be Solid
Halliburton is upbeat about the prospects for this year. The US land rig counts is expected to increase modestly, resulting in mid-single digit growth in North American revenues. This should mostly be driven on the back of greater activity in the Gulf of Mexico. This should bode well for earnings, as Halliburton is aiming to boost margins by two full percent points, after facing pricing pressure in 2013.
As a result, Halliburton should be able to report double-digit growth in earnings per share for 2014.
As such, Halliburton is able to break through the $30 billion revenue mark after posting revenues of $29.4 billion last year. 2013 adjusted earnings were $2.8 billion, or $3.15 per share. This was up from reported earnings of $3.00 per share a year earlier, with earnings per share growth entirely driven by repurchases. Reported GAAP earnings fell much harder after the company took a $1 billion charge related to the BP (BP) Macondo incident.
Investors in Halliburton have seen very strong returns over the past year, driven by increased payments to shareholders. The company aggressively hiked its quarterly dividend to $0.15 per share, yet the current yield of 1.2% is not too attractive. Note that Halliburton complemented this by steep share repurchases in 2013.
During 2013, Halliburton repurchased $4.4 billion worth of shares, which combined with the dividends cost the company nearly $5 billion. This represents cash flows to investors at a rate of 11% per annum, or nearly 2 times adjusted earnings for 2013.
Clearly such a scenario is not sustainable. While Halliburton still holds $2.4 billion in cash and equivalents, its net debt position has increased towards $5.4 billion. This has mostly been the case of share repurchases over the past year.
Implications For Investors
Investors are not too pleased with Halliburton's results. Shares have risen by about a third over the past year on higher payments to investors. This has pushed the valuation to 15-16 times adjusted earnings for 2013, based on a current price of around $49 per share.
Of course these are adjusted earnings, with GAAP earnings impacted by a billion through the Macondo incident in 2013. A company with the size of Halliburton will have to take these "one-time" charges as a usual cost of business, making me hesitant to use "adjusted earnings" as a multiple. Perhaps subtracting a "usual" $300-$400 million in unusual expenses per year from adjusted earnings, this leaves $2.5 billion in normalized earnings. On this metric the business is valued at 18 times earnings.
This is fair enough for a company with great long term growth prospects which is guiding for solid earnings growth again in 2014. While all of this seems fair, note that Halliburton stepped up payments to shareholders in the good times. Obviously historical oil downturns can be severe with great implications for shareholders. Note that shareholders lost more than 60% of their value in just a few months in 2008.
While Halliburton will probably remain an outstanding pick within the oilservice sector, current levels are more than fair. I remain on the sidelines.