Leading up to and immediately following the recent Halliburton (HAL) quarter, much of the sellside and TV financial talk shows centered worries over HAL's margins and generally ended with a tag line along the lines of "Good company but I like Schlumberger (SLB) better" or "HAL margins are going lower, SLB is better positioned". Look around and you'll see these types of headlines everywhere.
I own HAL and have for quite some time and the margin concern comments are nothing new. Given the recent slide natural gas prices the knee jerk reaction is almost always going to be sell HAL since they are so leveraged to North America (NAM).
The stock is already depressed and this latest reaction is overly simplistic. For several quarters, HAL's management team has been transparent about the ongoing shift in equipment from gas centric to liquids rich centric plays in NAM. If people are surprised that there will be some extra costs during the transitionary period over which this occurs (should be large done in 1Q12) then they have not been paying close attention.
Furthermore, management has been plain about a slow recovery occuring for international programs and despite recent Middle East and Africa regional turmoil, the international segment has grown (largely, but not entirely due to Latin America) and operating margins there are indeed recovering nicely.
But what is really simplistic is the comment that for the reason that SLB is not as exposed to North America it should be bought in place of HAL. The issues for HAL in NAM are near terms ones, and again, they just put up record numbers and once the transition to oilier completions is made they should see higher utilization and more pricing power. Being well positioned in NAM with an ongoing unconventional oil production boom in process is not a bad thing.
At the end of the day (or the first quarter in this case), will HAL's operating margins be further pressured? Most likely yes, probably on the order of 100 to 200 basis points. But as they come out of the transition the company emerges in an environment of high demand from liquids rich seeking, natural gas fleeing players like Chesapeake (CHK). Moreover, completing oil wells is more revenue intensive work than completing gas wells. There are more "touches" involved in the process. And the work will be steadier. Meanwhile, Gulf of Mexico activity for HAL (not for others) is above pre Macondo levels and the international segment continues to improve in the near term with a longer term promise of ramping activity from unconventional projects that are only in their infancy now.
So my thought is that HAL, trading at 9 to 10x 2012 estimates (depending on if you go by consensus or the low end of estimates out there), and under 8x 2013 estimates with its 20%ish operating margins is not necessarily unattractive vs SLB, trading at 16x and 13x 2012 and 2013 consensus estimates respectively with its 21% margins and apparently slower growing revenue stream. Since people don't as readily reel off margins at SLB let's finish with some graphs.
click to enlarge
