On Tuesday, BP alleged that Halliburton (NYSE:HAL) destroyed evidence that would prove them responsible for the 2010 Gulf of Mexico oil spill. During trading hours, Halliburton shares dropped 3.92 percent on an up day in the market. This means a $1.33 billion drop in the company's market cap. However, many of its competitors were also down on the day, so we can't assume the company's entire drop in share price came from these allegations. I have believed for some time now that Halliburton is an undervalued stock and I believe that after yesterday's drop, now is the time to buy Halliburton shares.
From a strategy standpoint, America's commitment to end its dependence on foreign oil along with more deep sea drilling means that oil field service companies like Baker Hughes (NYSE:BHI) and Halliburton will have a lot of growth and profitability for years to come. In addition, Baker Hughes and Halliburton will have 1 year forward P/E ratios of 9.5 and 8.7, respectively. For high growth companies, this is pretty cheap. Analysts are very bullish on both these stocks. Out of 31 analysts on Yahoo! Finance, 25 rate Baker Hughes as a "Strong Buy" or "Buy", while the rest put a "Hold" recommendation on the stock. For Halliburton, 31 out of 33 analysts rate the stock a "Strong Buy" or "Buy". Both companies also have high one year targets. Baker Hughes is expected to grow by 44.3 percent in the next year while Halliburton is expected to grow 52.8 percent over the next year. Stocks with bullish analysts and high targets are very rare in the market since high share growth expectations usually means high risk and a lot of downside potential.
I also don't think much will come of BP's allegations. Alpha Natural Resources (ANR), the current owner of Massey Energy, paid $210 million in a settlement for the West Virginia Mine Disaster in 2010. If Halliburton were to pay a similar settlement, it would have only a small effect on the stock as the company has a $32.7 billion market cap. Halliburton will definitely lose business from BP and other oil companies for what happened in the Gulf last year, but I believe that most of these potential losses are well accounted for in the stock price and are already factored into analyst estimates.
Both Halliburton and Baker Hughes are down over 25 percent in the last 6 months, while the S&P 500 has lost about 2 percent. I believe that both companies will have rebounds in their stock prices because they will both continue to grow as more and more drilling takes place. I believe Halliburton is currently the better buy mainly because the company's negative publicity has made the stock slightly cheaper. For those who think Halliburton will suffer as a result of these allegations, Baker Hughes is still a good buy right now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.