Is Halliburton Heading In The Right Direction?

Mar.11.14 | About: Halliburton Company (HAL)


Increased investment from energy companies.

Capitalizing on the demand for products, services and technology.

Completely safe returns with strong, cash generating potential.

Halliburton Company (NYSE:HAL) is a top-rated company operating in the oilfield services industry that has gotten momentum from increased spending in the entire energy sector. Halliburton offers products and services to the energy industry related to the exploration, development and production of oil and natural gas. The company looks very strong as the demand for energy is on the rise with the current economic growth, despite supply uncertainties in the Middle East and North Africa due to geopolitical tensions that serve as a risk to the industry.

However, the development of new energy resources is predicted to advance in complexity, which will further enhance the demand for service intensity. As a result of strong development activities by energy companies, most service and product providers like Halliburton Company, National Oilwell Varco (NYSE:NOV) and Schlumberger (NYSE:SLB) have been generating massive profits over the past two years and are predicted to keep that pace in the coming years.

Now, let's take a look at Halliburton to see how it is operating worldwide. I looked at the company's strategy and growth prospects to see how it continues to strengthen its financial situation, while maintaining its ability to pay dividends and work on buybacks.

Business strategy

Halliburton is looking to maintain itself in a distinct and sustainable, competitive position in the oilfield services industry by providing innovative products and services that extract proven reserves to maximize recovery for customers. To do this, the company is working on creating a portfolio that meets the needs of its customers. Halliburton is investing in technology and products, which ensure better results for both the company and its customers. By doing this, it is further looking to reduce costs and create value. In order to produce top-notch services and products, Halliburton is seeking to preserve a dynamic workforce.

Future growth prospects

In North America, the continuous shift from natural gas is due to the sluggish prices that have forced companies to shift their focus on liquid-rich basins. This shift is generating strong demand for the services in which Halliburton serves to provide. Based on recent moderations in the outlook of liquids pricing this year, Halliburton is expecting U.S. spending to grow by a mid- to high-single digit. Many companies are also switching to multi-well pads, which is resulting in strong drilling activities that enable the company to reach its desired operational scale and expertise. Also, the U.S. land rig count will increase further with the continued move to horizontals in the Permian basin. However, challenges are still expected in the Latin America region, particularly in Mexico and Brazil, as both areas are going through a transitional phase.

Halliburton has significant global exposure and the company has been generating massive growth from its international business. In 2013, both its revenue and operating income increased from international business. This was a result of strategic investments, innovative new technologies, increased pricing and cost cutting measures. Halliburton's completion tools, wireline technology, Multi-Chem service and perforating and testing product lines led to record revenues. In particular, the Multi-Chem service and the company's perforating and testing product lines set new landmarks of sales and operating income. Further, Boots & Coots activity in Algeria and software sales, not only in Russia, but all over Continental Europe, led the company to make massive sales.

Halliburton has the ability to generate consistent growth from its international business with its continued improvement in the market, recent contract wins and new projects. The company is looking to capitalize on the demand from international unconventional oil and natural gas, deepwater projects and mature fields, which account for over 70 percent of the world's oil and gas production. The company is expecting drilling and completion spending to further increase by the mid- to upper-single digit percentages. The company is expecting much better growth and margin expansion in the hemisphere with the contracts in hand.

Financial position and ability to sustain returns

Recently, Halliburton announced results from the entire year with a record revenue growth. Its consolidated revenue increased 3 percent to $29.4 billion. However, net income decreased by $1 billion due to the charges associated with the Macondo well blowout. In 2013, the company generated record revenue from its international regions. The company is expecting low, double-digit growth in its international business with 20 percent margin expansion in 2014. In North America, though, the company's revenue declined by 1 percent and its operating income declined by 6 percent in the fourth quarter of last year. However, with increase in the U.S. land rig count, Halliburton is expecting mid, single-digit growth with the increased horizontal service intensity and increased usage of pad drilling. Consequently, on a consolidated basis, it is expecting to generate double-digit growth in earnings per share for the full year of 2014.

Though the company's top line growth was strong in the year 2013, the Macondo incident caused it to get to the bottom line. However, the reduced income has not impacted its cash generating potential. The company's operating cash flow increased by 22 percent to $4.4 billion by the end of 2013. It also generated cash of around $1.3 billion for stock buyback with the new debt that was issued last year. Halliburton has repurchased around $4.4 billion of stock, which is 10 percent of its outstanding share in 2013. The company is looking to keep working on reducing its outstanding share in this year. Further, Halliburton increased its dividend twice last year to 0.15/share, which looks completely safe with the ability to generate massive cash flows. The company is looking to maintain a payout ratio based on an income of around 25 percent. At the moment, its payout ratio based on income is standing at around 21 percent. As the company is expecting to generate a double-digit growth in its income, we can expect a dividend increase in the coming days.

In conclusion

Although the company's Latin American and North American growth has been struggling, its international business has been offsetting the losses in those regions. The growth in drilling activities in North America and the company's move toward liquid-rich resources is generating demand for the oil services industry, and Halliburton is well-set to capitalize on the demand with its superior products and services. In addition, the company is in a strong financial position, generating strong growth in revenues. I consider its share buyback a key for both its dividend and price, as reduced share count enhances both dividends and earnings per share. It also strongly impacts the share price in a positive way.

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.