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Summary

  • Oil field services companies are on momentum.
  • Halliburton’s strategy to expand its market share in mature fields, deepwater, and unconventional, is generating massive profits for the company.
  • Halliburton offers an attractive entry point with the market correction.

Oil field services companies are gaining momentum with the increase in capital spending from the entire energy sector. Most of the production and exploration companies have been shifting their focus towards oil and liquid plays which substantially increased their capital spending over the past two years. Additionally, these companies are making significant transitions to multi-well pad activity, which is further enhancing drilling and completion services. Moving forward, long-term fundamentals of the oil field services companies look strong with the increasing demand for energy resources. International unconventional oil and natural gas, deepwater projects, and mature field will add to activity improvements.

Halliburton Corporation (NYSE:HAL) is one of the best companies operating in the oil field services industry. It has been generating massive growth in revenues and earnings over the past few years. The company has been capitalizing on the growing demand with its innovative products and technologies. In the past three years, Halliburton has generated 17% growth in revenues and around 10% growth in earnings. Recently, the company announced second-quarter results with record quarterly revenue of $8.1B and a substantial 23% increase in operating income. The company has generated strong growth all over the world. In North America, its revenue growth was at 11%, in the Eastern Hemisphere by 9%, in the Middle East/Asia by 11%, in Europe/Africa/CIS by 6% and in Latin America by 4%.

On top of strong revenue growth, its margins have been improving with the increasing demand for its services and efficiencies in its cost structure led by the application of key technologies and strategic initiatives. Halliburton is anticipating strong growth activities for the remainder part of this year with a strong demand for consulting and software and increased integrated project activity. To continue to capitalize on the demand, Halliburton is focusing on mature fields, unconventional plays, and deepwater markets by leveraging its broad technology. The company is also looking for acquisitions which align with its business structure and further enhance its product and services portfolio. Recently, it acquired U.K. based Neftex Petroleum Consultants specializing in consulting for subsurface risk reduction and sequence stratigraphy-based products.

Furthermore, the company's business plan includes investments on producing and enhancing technologies and its infrastructure to ensure future growth. Halliburton intends to expand its international market share along with margin expansion in North America. To do that, it is investing a substantial amount in international regions and leveraging technology and reducing cost with efficient management. That is the reason the company has increased its capital budget for 2014 by $300M to $3.3B. Its cash generating potential is very strong to support potential investments. With the strong growth in its earnings, its operating cash flows also increased by 18% compared to the past quarter. Its operating cash flows are strong enough to cover capital investments and dividends for investors.

In the past quarter, its operating cash flows were at $2B when capital expenditure was at $1.3B and dividend payments at only $254M. Its operating cash flows are offering a lot of room for dividend increase in the coming days and Halliburton has recently announced that it will distribute around 35% of operating cash flow to share holders, which is double than previous level. With its strong cash generating potential, it has also recently announced a $4.8B of new buyback program which will positively impact its share price and dividends.

The company's cash position shows that it has no risk of liquidity and its dividend is sustainable. Let's take a look at its business outlook to reveal any other risk associated with the company. HAL is operating in the oil field services industry which is on momentum with the healing of economy. Most of the Exploration & Production and Integrated Oil and Gas companies are moving towards liquid and oil plays which are forcing them to accelerate investments. This in turn enhances the demand for oilfield services providers. Further, long-term fundamentals are also strong as the demand for energy resources are growing both in developed and developing economies.

In Conclusion

Halliburton's strategy to expand its market share in mature fields, deepwater, and unconventional, is generating massive profits for the company. This strategy allowed it to post record revenue in its production enhancement, cementing, baroid, wireline, artificial lift product lines and production chemicals. With the record growth in the first half of this year, the company is set make record results for the full year. With the present market correction, Halliburton's share price only lost 4% which offers an opportunity to initiate a position in the company. Further, with its new strategy of distributing 35% cash to share holder, I am expecting a hefty dividend increase from the company and steady price appreciation over the coming days.

Source: Prospects Look Bright For Halliburton Corporation