Halliburton Company (HAL) announced on Wednesday, June 6th that North American margins would be hit by around 300 bps because of a higher than expected increase in guar gum prices. This is in addition to guidance for a North American margins decrease of 200 to 250 bps in last quarter's release. This announcement has taken Halliburton down around 4%, to $28 per share, approaching at 52 week low of $26.99.
While this will create downward pressure on earnings this quarter, and possibility through the end of the year I do believe this is a positive sign for oil service companies. Prices of guar gum are being forced higher by strong demand for fracking services. I think this high demand is a positive sign given the recent downturn in oil prices, and the historically low prices of natural gas.
Also I believe guar gum prices will began to fall as supply of guar increases. While Halliburton has not been able to pass along cost increases fast enough on the way up, they will also likely be slow in lowering prices on the way down. About 70% of global guar supply comes from India, were acres planted are expected to increase 50% next year. In the end of March prices reached a record of $1711 per 100 kilograms in Mumbai. Rama Industries, the third largest shipper of guar gum believes prices could drop by as much as 50%.
Halliburton reports earnings on July 23th and I believe as earnings estimates are taken down the company could be set up for an earnings beat. This is a company that has a strong record of beating earnings, and it is only trading at around 7 times forward earnings. With revenue growth estimated to be 15% this year, and 10% next year.
The move in the stock down to $28 is a strong break below longer term support around $30 per share; however I expect Halliburton to find support as it approaches its 52 week low at $26.99. I would be a buyer of Halliburton near the 52 week low price. If the economy improves, oil prices will pick up, and if the economy fails to improve the Federal Reserve will continue accommodative measures. I believe that would hurt the dollar, and increase commodity prices, including oil, over the medium term. Either way I think oil will be higher over much the next year.
Data sourced from: Yahoo!Finance, and company filings. Chart from: Freestockcharts.com.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HAL over the next 72 hours.