Halliburton: Key To Survival

| About: Halliburton Company (HAL)


Q3 earnings are out and I discuss results.

We must get back to the fundamentals.

I am watching one key data point.

Halliburton (NYSE:HAL) is an oil service stock that I have traded many times over the years despite having long preferred rival Schlumberger (NYSE:SLB). That said, both are very similar in many respects. The pain in the oil sector has begun to subside as oil has started to climb back. For the last year and a half, the pain has been real for investors in the sector, but I have been behind the names, encouraging you to buy this dip for months. Those calls are paying off. Now that the drama of the Baker Hughes (NYSE:BHI) ordeal is behind us, save the $3.5 billion Halliburton dumped, we need to get back to looking at the fundamentals to determine the keys to survival, and we must carefully consider the performance of these names on an individual basis.

To determine where the stock may be heading, aside from oil prices, we need to talk about performance. Again, with oil prices so low of late, though rebounding somewhat in 2016, it has crushed the company. This is particularly true when we look back two or three years ago. The higher the price, the better. That's just a fact that is true for all of the oil service names. That said, Halliburton missed analyst expectations on revenues and beat expectations on the bottom line.

So what kind of numbers are we talking about? Well, despite an earnings beat, a comparison to last year clearly demonstrates the pain the company has been experiencing. Of course, it should surprise no one, with oil having dropped to decade lows coming into 2016. The company did swing from a loss from continuing operations in its second quarter of $121 million to a gain of $128 million or $0.01. This beat analyst estimates by $0.08 per share. Adjusted operating income was $62 million in Q3 2016, down from the adjusted operating income of $506 million in Q3 2015. Again this is no surprise and is a direct result of revenues that dropped markedly. Halliburton's total revenue in Q3 was $3.83 billion compared to $5.58 billion in Q3 2015. Ouch. This also missed estimates by $70 million.

Let us not forget that expectations were drastically low, thanks to oil prices. Still, Halliburton managed to control expenses, and really this is the key to survival for this sector right now. Over the last year, the company has slashed its expenditures in just about every category. That's really all that matters in the short run and really what you need to keep an eye on. Commodity pricing is driving revenues, so the bottom line can thus be impacted by watching spending. With a cursory review of revenues and operating income/loss statements, it becomes clear that the company managed to decrease operating expenses in most categories, and this is the key to its survival.

It is no surprise that with revenues declining so rashly that operating income would be hit year over year. Looking ahead, oil is rebounding in the near term. I expected a terrible quarter, and once again I was not disappointed, although the company beat my expectations. However, the market may be turning a corner. With the merger and acquisition debacle in the past, we can get back to watching expenses, production and debt. I maintain a hold rating on the name, but am optimistic for the coming quarters given the move higher in oil.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I am/we are long SLB.

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.