Halliburton - Preferred Oil And Gas Supplier

Oct.21.12 | About: Halliburton Company (HAL)

Shares of Halliburton (HAL) rose some 3.5% over the past week. The second largest oilfield service company reported its third quarter results on Wednesday.

Third Quarter Results

Halliburton reported third quarter revenues of $7.11 billion, up 8.6% on the year before. Reported revenues were roughly in line with analysts estimates.

The company reported income from continuing operations of $625 million, or $0.67 per diluted share. Reported net income of $608 million came in at $0.65 per diluted share, down from $0.80 last year. The company took a $30 million charge related to acquisitions and reported a $13 million gain from a settlement of patent infringements. Earnings per share were in line with analysts expectations.

CEO and Chairman Dave Lesar commented on the results, "I am pleased with the strengthening of our market position in key international geographies and in product lines where we envision strong growth in the coming year. We believe our international strategy is playing out as planned, as evidenced by our third quarter revenue for both the Latin America and the Middle East/Asia regions."

Segmental Information

Completion and Production

Revenues for the completion and production division rose 6.7% on the year to $4.29 billion. Revenues fell 4% compared to the second quarter as a result of pricing pressure and reduced activity in North America. Operating income fell 35% to $591 million, compared to the second quarter. The decline in operating profits was the consequence of pricing pressure and increased costs for production enhancement services.

Drilling and Evaluation

Revenues for the drilling and evaluation business rose 11.7% on the year to $2.82 billion. Revenues increased 2% compared to the second quarter driven by a solid performance in Latin America and the Middle-East. Operating income rose 9% compared to the second quarter, to $430 million. The increase in profitability was driven by solid levels of activity in Canada, Mexico and the Middle-East.


Halliburton ended its third quarter with $2.0 billion in cash and equivalents. The company operates with $4.8 billion in long term debt, for a modest net debt position of $2.8 billion.

For the first nine months of 2012, Halliburton reported revenues of $21.2 billion. The company reported a net income of $1.97 billion, or $2.12 per diluted share. Full year revenues are expected to come in around $28 billion. Halliburton could earn around $2.6 billion, or $2.80 per diluted share.

Currently, the market values the firm at $32.5 billion. This values the firm at 1.2 times annual revenues and 12 times annual earnings.

Currently, Halliburton pays a quarterly dividend of $0.09 per share, for an annual dividend yield of 1.0%.

Investment Thesis

Year to date, shares of Halliburton are trading largely unchanged. Shares traded around $35 in January and fell to $27 at the start of the summer, as oil prices fell amidst fears about a global economic slowdown. Shares recovered to $37 in recent weeks, currently exchanging hands at $35 per share.

Over the past five years, shares of Halliburton have fallen some 10%. Shares fell from $50 in 2008 to lows of $15 later that year. Shares steadily recovered to $55 in 2011 before falling back again. Between 2008 and 2012, revenues rose from $18.3 billion to an expected $28 billion in 2012. Net income rose from $2.2 billion to an expected $2.6 billion this year.

The boom in the US oil and gas market has some unintended consequences. Oilfield suppliers like Halliburton and some of its competitors, were quick to provide the equipment at a time when oil and natural gas producers were scaling operations back. Earlier this year, natural gas prices hit record lows as a result of overcapacity caused by record drilling activity and a mild winter.

To make things worse, margins came under more pressure as raw materials costs for drilling increased. Halliburton decided to stockpile guar, a key fracking fluid, in the second quarter. This decision is putting severe pressure on third quarter margins as prices of guar have begun to fall. The number of US oil rigs increased by 3% over the second quarter, while the number of gas rigs fell by 15%.

Within the oil and gas supplier industry, Halliburton is my preferred choice. Shares trade at lower revenue and earnings multiples than many of its competitors, and the company has a relative robust balance sheet with a mere net debt position of $2.8 billion. Key triggers to watch are a recovery in natural gas rig counts, or a dividend hike.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.