Oct
26
There is no doubt about it- Halliburton has taken a beating in the last few months. In late August this oilfield services giant traded for about $45 but due to falling oil prices and an expected fall in North America drilling demand, HAL now trades for only about $19. Now there are tons of reasons to be bearish about the oil services industry right now, the drop in crude will undoubtedly lower demand for HAL’s product as oil exploration companies will spend less money on drilling. The global slowdown and OPEC’s inability to stop falling oil prices are also worrisome for HAL. But I think this all has been priced into HAL and despite these risks I still see upside to old uncle HAL, especially if you have a long enough investment horizon.
Overview
Halliburton is headquartered in Dubai and has operations in over 70 countries. In 2007, HAL had revenues of $15.3 billion and operating income of $ 3.5 billion. According to its 2007 report, the company generates 45% of its revenue (40% of its profit) from Drilling and Evaluation and 55% of its revenue (60%of its profit) from Completion and Production. Also it is important to note that 45% of overall revenue comes from the US
The Bullish Case for HAL
It’s cheap, granted for a reason, but it’s still cheap. Falling oil prices, less drilling, potential terrorist threat, low capital expenditures from US oil companies, yes – But HAL is still trading for about 6.5 times next year’s earnings (18.6/2.85). Halliburton also has $1.2 billion of credit it can draw upon until July 2012. With a ROE for 35 % and a safe LTD/cap of 27 %, I think HAL is in a good position to benefit from the long term oil demand. The recession will not last forever, China, India, and the rest of the world are going to come back thirstier than ever for the black crack.
Conclusion
In conclusion, I think HAL is a great 401 K stock. The world is not going to stop needing new sources of oil, especially since 70% of current production comes from mature fields. I would take this drop in HAL’s price and add some HAL to your portfolio at bargain basement prices (6.5 times next year’s earnings).
Disclosures - None.
