Halliburton - Appeal Remains, Yet Buy Selectively After Year To Date Returns Of 40%

| About: Halliburton Company (HAL)


Halliburton is benefiting from the recovery in the oilfield service market.

The strong US exposure boost the growth profile and reduces geo-political risks.

I like the stock, the valuation and opportunities for margin expansion. Yet after 40% returns so far this year, I am only buying on significant pullbacks.

Investors in Halliburton (NYSE:HAL) were pleased with the solid second quarter earnings report that was accompanied by a billion dollar hike to its share repurchase program, which now totals $6 billion.

The company's strong presence in the US actually reduces political risks and increases its growth profile in this environment. I like the stock on a significant pullback but won't rush in at current highs after this year's strong momentum.

Second Quarter Highlights

Halliburton posted second quarter sales of $8.05 billion, up 10.0% on the year before. Sales rose by a strong 9.6% on a sequential basis as well driven by the relatively weaker first quarter, a time when Halliburton's operations are challenged due to winter weather in many geographical areas. Revenues comfortably beat consensus estimates at $7.88 billion.

The company posted earnings of $774 million for the quarter, up 20.2% compared to last year. Earnings per share grew even quicker thanks to sizable share repurchases over the past year.

Earnings came in at $0.91 per share, up nearly 32% on the year and came in line with consensus estimates.

Looking Into The Performance

Revenue growth was largely driven by the company's largest completion and production segment. Sales came in at $4.94 billion, up 11.0% compared to last year. Operating earnings were up by 21.2% boosting margins to very healthy levels of nearly 18.0%. Of course the strong performance in the US, Saudi Arabia as well as beneficial weather in Europe and Russia aided the topline.

Drilling and evaluation sales rose by 5.2% to $3.11 billion. Despite the increase in topline sales, operating earnings dropped by a million to $414 million. As such, margins fell towards 13.3% of sales.

All of this boosted sales, while earnings per share saw an additional boost from sizable share repurchases. The total share count dropped by little over 8% over the past year.

Just like its competitor Schlumberger (NYSE:SLB) reported, Halliburton's sales growth was driven by North America amidst the energy revolution. Sales rose by 14.2% which is very important given that the company generated 54% of total revenues in that area over the past quarter.

Europe and Africa, as well as the Middle-East and Asia showed healthy revenue growth was well, while sales in Latin America were down.


At the end of the quarter, Halliburton held nearly $2.4 billion in cash and equivalents. Its total debt stands at $7.8 billion, resulting in a $5.4 billion total net debt position. Note that the company has made $1.3 billion in contingency reserves related to the Macondo well incident.

On a trailing basis, Halliburton has posted sales of $30.5 billion on which it posted earnings which are approaching $3 billion.

At $71 per share, equity in the business is valued at $60 billion. This values the company's equity at roughly 2 times annual sales and 20 times trailing earnings.

Difficult Past, Positioned For Growth

Halliburton had a somewhat troubled past. It has seen many controversies including the 1998 purchase of Dresser Industries which it renamed as KBR and has been involved in numerous scandals. This led the company to try to sell the business in 2005, while it took until 2007 until the business has been spun off.

Other issues were of course the close ties to former Vice President Dick Cheney, controversies surrounding contracts in Iraq, and the involvement in the 2010 disaster with BP's (NYSE:BP) Deepwater Horizon explosion.

That being said, the company has still benefited from the strong growth in the industry. From a base of revenues of $10 billion by 2005, it has grown sales to $30 billion on a trailing basis. The trouble is that earnings have been lagging significantly, and hardly moved up in this time frame. The company has repurchased 15-20% of this shares since 2005, especially in recent years. This has aided earnings per share quite a bit.

At its first quarter earnings presentation, Halliburton furthermore commented on the favorable long term growth outlook. Between 2012 and 2020 the company sees 11% compounded annual growth in the deepwater well service market anticipated to increase towards roughly $100 billion by 2020. This combined with the fracking operations in the US onshore should boost the future top and bottom line going forwards.

The clear focus for the company should be to boost margins which have been slipping over the past decade. Net margins of about 10%, trail that of industry leader Schlumberger by a wide margin, after it has reported trailing margins of about 14%.

Final Takeaway

Despite the troubled past, the controversies and real lack of earnings growth, shares of Halliburton have been on the rise over the past decade. Shares peaked at nearly $50 in 2007, but fell to lows of just $15 during the financial crisis.

Excluding the volatility in 2011 and 2012, shares have steadily risen to current highs in the low $70s. Shares currently trade at 20 times trailing earnings which implies a small premium compared to the overall market. This comes after shares have risen 40% already in 2014.

While the premium might be warranted given the strong historical growth, and margin expansion opportunities ahead, don't forget that Halliburton remains a cyclical business. The strong US exposure might actually be a big pro in this geo-political uncertain environment. An added benefit are the strong growth prospects for production in the US.

For now management continues to return a lot of cash, with Halliburton currently allowed to repurchase $6 billion worth of shares, or 10% of the outstanding share base.

I must say that I really like the shares, but am blown away by the very steep momentum so far this year. I am a buyer if hopefully a nice correction would occur, hoping for a entry point in the low sixties in order to acquire a strong player at general market level multiples.

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