Explosive Returns On The Horizon With Halliburton

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Highlights

Deep Sea Fracking: Deep-sea fracking is a lucrative segment of the oil industry in which Halliburton has placed themselves at the forefront. By positioning themselves as the leaders  of this innovative business venture Halliburton could gain an incredible market share should deep-sea fracking become the newest growth opportunity in the oil and gas

Macondo Settlement: Halliburton settled the majority of their lawsuit from April 20th, 2010 for $1.1 billion. The total was lower than expected and helped to free up $500 million of capital which has been targeted as the primary fund for upcoming fracking as well as buying shares back. This settlement as well as redistribution of capital has led to a more optimistic outlook for the fourth quarter and reaffirming investors’ belief in the previous strong performance and growth

Strong Year-To-Date: Since January 1st Halliburton has posted one of its highest years of growth in the company’s history. The stock price hit an all-time on July 24th highlighting a great year for stock performance. Halliburton has capitalized on this performance by introducing new potential market moves in order to continue the momentum forward into the fourth

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Recent News

On 9/2/14 Halliburton came to an agreement with a substantial majority of the plaintiff’s case claims issued in result of the Macondo well incident in the Gulf of Mexico on 4/20/10. The settlement totaled $1.1 billion and has freed up $500 million which Halliburton intends on using to buy back shares. This settlement is considered a “non-event” because the total amount is less than what was set aside for the legal fees and total payout to cover the necessary settlement.

Halliburton is currently the worldwide leader in fracking, cracking rocks underground in order to allow oil and gas to flow more freely, and is pursuing viable environments where this can become successful. Currently, while Halliburton has seen success on land they are investigating the profitability of venturing into deep-sea ocean fracking. By being the first mover they are positioning themselves at the forefront of a potential hyper-profit opportunity. However, fracking has received a notable amount of negative press because reports show that it can contaminate ground water.

Halliburton posted lower than expected earnings for the second quarter due to lesser activity in Brazil and Venezuela. The realized earnings per share reflected the previous estimates of analysts solidifying the investors’ belief in the current health of the company. Halliburton saw higher second quarter earnings from 2013 through increased cementing work in Mexico as well as improved drilling operations in Norway and Saudi Arabia.

 

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Company Analysis

Halliburton is classified as a Large Cap growth stock that specializes in oil field services. Halliburton provides drilling and pumping services in order to extract and create oil and gas. Halliburton has continued its goal of being the industry leader in not only quality, but innovation as well as they continue their pursuit of fracking.

Halliburton has done well in its pursuit to increase its efficiency while lowering cost. While the net income was at its lowest since 2005 much of this can be attributed to the legal fees incurred. Schlumberger continues to be Halliburton’s main competitor even though Schlumberger has more than 50,000  employees and  a  larger  market cap.  Halliburton has done

well in the international markets and positioned themselves as a large partner with Mexico, Venezuela, Saudi Arabia, as well as others. This international presence combined with their heavy production in the United States creates great growth opportunity in both the short and  long term.

Halliburton is consistently in the market for the acquisition of smaller companies and shows no sign of change. By purchasing companies Halliburton has cut costs and increased revenue due to the increased  cost that would come from entering a brand new area and setting up the necessary equipment for drilling and pumping. These acquired companies provide access to untapped areas without the upfront cost

from equipment as well as structuring a brand new management team and supplying employees. These acquisitions improve Halliburton’s market share while increasing revenues and reducing costs.

Industry Analysis

Halliburton Company is in the basic materials sector and the oil and gas equipment/services industry. Demand is driven by oil and gas prices. The profitability of individual companies depends on technical expertise and efficiency of operations. Oil and gas provides 60% of all energy needs worldwide with the other 40% coming from coal, nuclear, and hydroelectric sources.

With the current economic recovery there has been an increase in oil and gas use from not only consumers but also corporations due to the rise in sales prompting more shipping and subsequent oil and gas purchases to suffice the growing demand.

Risk Analysis

The mix of Halliburton’s high beta, 1.79, as well as the industry’s high standard deviation, causes the risk of the oil and gas industry to be higher than average. However, Halliburton  has  diversified well in order to protect against from any market downswings. Halliburton  has  achieved this by entering and sustaining multiple international ventures in multiple continents. With the current positive market conditions Halliburton is poised to thrive. Companies are experiencing higher sales which increases the demand for oil, therefore, increasing revenue potential for Halliburton.

Gas prices have dropped 4.2% over the last year and 11.4% from September  2012.  These dropping prices will continue as we go into winter but the oil industry experienced a strong summer period due to an increase in travel. Even though the price wasn’t as high as anticipated, the demand has increased which implicates a possible growth as well as a decrease in risk. Oil is historically a riskier industry, unleveraged beta of 1.24, but most companies have become more hedged in recent years leading to a decrease in risk. Most risk comes from the exploration of the industry which has the potential to create incredible profit but also could end in millions of dollars lost.  This risk is evident in any innovation which Halliburton strives to achieve.

Growth Analysis

Over the last year Halliburton has shown no signs of slowing its current growth even during the finalization of a billion dollar lawsuit. With the new availability of $500 million Halliburton is positioned to continue this growth into the next few years. By using the Holts Model I was able to find the fair value of Halliburton, $77.61.  Earnings have been growing at 17% for the last 5 years. I believe that Halliburton will surpass the stock price high reached in July, $74.33, in the next year and believe their current growth will continue into 2015.

David J. Lesar, President and CEO, spoke of the success in Latin America. He shared on  4/21/2014 during a conference call that they “expect Latin America revenue and profit to be in line with 2013 levels. Longer term we are very optimistic about our position in Latin America and the future growth potential in this market”. In order to continue their historical growth rate, Halliburton must focus on its operations in Latin America. Analysts all agree that Halliburton is currently a buy. FBR Capital and Howard Well both believe that Halliburton will also outperform the market. The current estimate of target price is $82.54. This coincides  closely  with  my estimate found through the Holt’s Model.

 

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