Halliburton (HAL) should do well thanks to one simple trend: fracking.
Fracking is a technology that's ready to blow up even as American energy exports and domestic usage are growing rapidly. It's an early indicator for a new manufacturing renaissance. And the best way to play it is with Halliburton and other fracking-related energy suppliers. They're the ones laying a foundation for this explosion.
Reuters had some favorable comments about Halliburton's key driver of revenue:
Also, Halliburton has particularly benefited from rapidly growing demand in the North American pressure-pumping market (well stimulation and cementing) where it is the market share leader. This market -- which has accounted for a disproportionate share of Halliburton's growth in revenues over the past two years -- has been propelled by greatly expanded use of relatively new hydraulic fracturing technology to exploit oil and gas shale deposits that previously were not economical. The outlook for continuing demand growth remains favorable. However, leading players in the hydraulic fracturing business -- including Halliburton -- have been investing to expand their pressure-pumping capacity, raising the specter of overcapacity.
However, there's a potential fly in the Halliburton ointment. There's some downside risk due to pending lawsuits stemming from the British Petroleum (BP) Gulf of Mexico drilling fiasco a few years ago.
The worst seems to be over, though. Take a look at the following chart:
You can see that although Halliburton has been correlated to overall market performance, it appears to have finally hit bottom on June 28. I'm a firm believer in volumes, which drive prices. When you look at the chart on June 28, you can see a $2.75 price movement over just less than a week. Was this upper price movement driven by news? It seems that strong numbers from the likes of Chevron (CVX) on that day raised the overall confidence of the sector.
As any trader knows, this spells a buying opportunity. Furthermore, here's another key quote from the Reuters article that supports my outlook for a short-term buying position:
This is a favorable longer-range development for Halliburton in that oil drilling requires more intensive use of hydraulic fracturing than natural gas drilling. However, the need to relocate equipment is hurting Halliburton's margins over the short term. Cost inflation of certain critical raw materials, as well intensification of price competition, has also strained Halliburton's margin.
We believe this could continue, constraining the pace of Halliburton's earnings compared with the past year.
Now, this stock is definitely correlated to overall market performance. But at the same time, it has drastically underperformed the S&P 500 since September 2011.
This suggests an excellent buying opportunity over the next four months. I see a potential 8%-10% increase here, and you can thank the energy reserves of Bakken, N.D., to facilitate this renaissance for companies like Halliburton.