Currently Halliburton (NYSE:HAL) is trading for $27.80 which is just 40 cents more expensive than the company's 52-week low price and 52% cheaper than the company's 52-week high price. It is amazing to see a perfectly profitable company lose more than half of its value in less than a year. Lately oil prices have been trending down, which may cut into some of this company's profits. Along with this problem, the company has an even bigger problem. BP (NYSE:BP) has sued it for some of the damages in the oil spill in the Gulf of Mexico in 2010. The final bill might be huge as we have seen it burn much of BP's cash reserves already. Still, the company has already lost about $26 billion in market share, and most of the damages must be already priced in.
On Friday I bought 200 shares of Halliburton for $27.80 and wrote 2 call contracts with a strike price of 27, expiring in January 2013. My premium was $3.59 per share, resulting in $718. This will protect me from a downside of all the way to $24.21, and Halliburton hasn't been that cheap since the financial crisis of 2009. If the stock ends the year at a price higher than $27 a share, I will end up selling my shares for $27 and keep the premium of $3.59, resulting in an actual sale price of $30.59. This will result in an upside of 10% in 7 months. All the stock has to do is to stay above $27 until the end of the year. I would say that the trend will be on my side as the stock market usually sees a rally towards the end of the year. Those not as conservative as me could also pick a strike price out of the money.
Of course I wouldn't buy a company simply based on technical details like that. A company should also have strong fundamentals to minimize any possible surprises. Currently the only stock I hold that doesn't currently enjoy a strong balance sheet is Nokia (NYSE:NOK), however I hope that to come to a change soon. I've already talked about that particular company in multiple articles, so I will reserve this article to talk about Halliburton.
S&P rates Halliburton as "buy" and gives the company a 12-month price target of $46. While I agree with the "buy" rating, I find the price target to be highly optimistic. A more realistic price target would be $30-$35 due to the legal issues surrounding the oil spill. Currently, Halliburton's cash reserves are under $3 billion, which means that if the court decided that Halliburton would have to pay a large fine regarding the oil spill, the company would probably have to sell some of its assets or take out a loan to pay off the fine.
Apart from the legal headaches of the oil spill, the company seems to be in a good shape. Halliburton enjoys a trailing P/E ratio of 9, and it is expected to earn $3.80 per share at the end of this year and $4.93 per share at the end of the next year. Of course, these numbers are highly dependent on oil prices and subject to change, but these numbers provide the company a forward P/E ratio of 7.3 for this year and 5.6 for next year. If the company ends up not getting fined by the courts, then it will have an upside potential of 50-60%.
In the last 5 years, the company saw its revenues increase by 62% and its earnings increase by 45%. The growth is likely to continue in the long run as oil prices can't stay low for long. In the long term, global energy demand is likely to double between now and 2030 while the amount of oil in the proven reserves are expected to stay flat at best. Also, it is fair to say that natural gas prices have bottomed this year and they are likely to go up in the long term. Long term trends are bullish for this company. Halliburton's revenue is expected to grow at an annual rate between 10% and 15% in the next few years. The company generates more than half of its revenue from US and Canada, and there is plenty of potential in South America, Africa and Middle East for the company.
In conclusion, I am definitely bullish on Halliburton in the long term. Keep in mind that by long term, I mean between 3 to 10 years. Many times when analysts say "long term" they are not exactly clear on what their time frame is. Given that Halliburton doesn't pay huge fines as a result of the oil spill in 2010, the company has more than 50% of upside. Even in the worst case scenario, the stock price wouldn't go down much more from here. This may be a good entry point at Halliburton for long term investors.
Disclosure: I am long HAL.