When it comes to gum, most people think of that chewy substance some of us get stuck on our shoe from time to time. The one thing we don't often think of when it comes to gum, is the Oil & Gas powerhouse, Halliburton (HAL). According to an article featured in Wednesday's Wall Street Journal, gum, and more specifically 'Guar Gum' is as the forefront of the company's latest earnings report.
So what exactly is Guar Gum, and why should investors be concerned over Halliburton's efforts to stockpile as much as the company can? According to FRx-Inc., "The fluid most commonly used during hydraulic fracturing is guar gum gel. Guar gum is a food additive derived from the guar bean. Guar gum forms short-chained polymers when mixed into water, resulting in a solution that has the consistency of mineral oil". Considering the fact Halliburton is the second-largest oil-field-services company in the world, Guar Gum is a crucial component of its business, except for the fact the company guessed wrong and as a result investors will now have to face the consequences.
According to Erin McBride, of the Motley Fool, "the sudden increase over the past two years in fracking, the demand for guar has skyrocketed, and along with it, the cost. The price two years ago was about $1 per pound for guar powder. The commodity peaked at approximately $12 per pound. The price of guar has come down in recent weeks to about $5 per pound, and that decline is likely to continue". The erratic behavior in the price of Guar Gum over the last 24 months demonstrates that fact that Halliburton, and companies such as Baker Hughes, Inc. (BHI) and Schlumberger (SLB), hadn't had a true grip on the necessary commodity and as a result clearly paid a price that would affect earnings for quarters if not years to come. One of the things Halliburton noted in its recent earnings report was the fact that "in North America, revenue was down 5% and operating income was down, driven mainly by pricing pressure in hydraulic fracturing, guar cost inflation, and activity disruptions due to Hurricane Isaac. We are also seeing activity reductions by some of our customers as they continue to moderate activity to operate within their stated 2012 budgets".
Based on my analysis it seems pretty clear that potential investors looking to establish a position in companies such as Halliburton, Schlumberger, and Baker Hughes, Inc. should begin to look for alternative investment vehicles. Why? If we consider the fact that Halliburton's earnings came in-line with street estimates of $0.67/share on revenue of $7.1 billion most investors would see those numbers as being fair. However, if we take into consideration the fact that many analysts "had penciled-in 87 cents (as recently as May) and, at the beginning of the year, they were projecting a little over a dollar", we would notice a decline of nearly 33% in terms of earnings expectations due largely in part to the company's stock piling of Guar Gum. Although all three companies trade at P/E ratios under 16, and pay an average yield of 1.3%, I'd wait for a sell-off of at least 3%-5% before establishing a position.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.