Halliburton (HAL) is quickly going from a market leader in the oil services field to the one that is always wrong. Today, CFO Mark McCollum reported at a conference that domestic revenue would miss estimates. This after the company famously complained about high guar prices squeezing margins, only to load up on the product at the peak price.
The company is one of the world's leading oil service firms, with revenue approaching $29B for 2012 and a market valuation of nearly $30B.
Not surprisingly, the stock has traded down 2-3% today, especially after McCollum mentioned that the profit margins would take a 2.5 to 3 percentage point hit.
With surging WTI prices hitting over $95 during the third quarter, it seems odd that Halliburton would see a slide in demand. Possibly the company is still too focused on natural gas shale plays, where demand has plunged.
In fact, several domestic exploration companies recently highlighted increasing capex spending for this year. Continental Resources (CLR) announced plans to raise capex in the Bakken play and SandRidge Energy (SD) increased capex by over 10% for the Mississippian play. These were smart moves by these explorers to increase production while oil prices are surging and drilling costs are dropping.
Clearly Halliburton has been unable to offset the lower pricing by reduced costs.
Per Baker Hughes (BHI), the North America rig count is down 74 rigs compared to last year. More importantly, the rigs exploring for gas are down roughly 50% to only 473. The rigs exploring for oil are up 355 from last year to 1,419.
The August 31st rig count of 1,894 has slipped from the peak in Q2 of 1,986. This slippage does provide cover for the reduced revenue estimates at Halliburton, but the shift to oil exploration from gas suggests that maybe some competitors are doing better.
Possibly the best sign of the issues at Halliburton was the decision to purchase extra inventory of the guar gum at the peak. In fact, the company might have caused the blow off top in the prices. Guar gum is used as a thickening agent for oil and gas extraction.
According to this Bloomberg article, guar prices have plunged nearly 70% to $539 per 100 kilograms. On top of that, shipments from India are now forecast to decline for the year started April 1 by nearly 20% to 400,000 metric tons.
In fact, the following quote from Halliburton CEO David Lesar suggests that even he recognizes the error of his company's ways: "We should not have purchased the extra inventory," he said during a conference call on July 24.
Considering the spate of issues at Halliburton, investors should consider placing the stock in the penalty box. No longer should the company be seen as the market leader. In fact, it might be too large to maneuver the quickly shifting landscape in the markets.
Even with ongoing tax issues, Weatherford (WFT) appears to be better situated. The company has a stronger international presence and relies less on domestic natural gas production.
By far, the favorite of the domestic producers should be C&J Energy Services (CJES). The company not only appears to be a better operator, but it has a much better relative valuation (see article). The fact that C&J has a bigger loss today highlights the markets' flawed mindset in favor of a company that continues to miss.
The oil services sector appears very attractive at these stock prices compared to the potential growth in the sector long term. Unfortunately, it appears that investors are still focusing on a stock that has now become a sector laggard after a several mistakes.
Other sector players such as C&J and Weatherford appear more attractive. When the demand for natural gas rigs returns to normal levels, the sector could see huge growth in the U.S., making the stock prices very attractive at these levels.
Investors might also want to buy into the explorers, such as Continental or SandRidge, as both companies take advantage of the opportunities in the market.
Disclaimer: Please consult your financial advisor before making any investment decisions.