The energy sector is one of the most cyclical sectors of the economy, primarily because of its reliance on oil. Oil prices are often highly volatile depending any number of factors, ranging from geopolitics to weather phenomenon to simply supply and demand. A good example of that volatility was seen in the latter part of 2014, when oil prices dropped from above $100 per barrel to a low in early 2016 around $27. That put a lot of pressure on the entire energy sector, and the oil industry in particular, driving oil producers as well as the companies that provide equipment and services to them into their own extended bear market.
A rally until late last year pushed oil prices near to the $80 per barrel mark that was fueled by continued high consumer demand and also by supply concerns. The supply of West Texas Intermediate (WTI) crude was constrained through a big portion of last year by pipeline capacity limitations in the Permian Basin, where most of the biggest supply of U.S. shale oil comes from. Producers in the basin have produced more oil than current pipelines can transport to the Gulf of Mexico. There are several projects underway to build more pipeline capacity, but most of those projects are not HALcted to even approach completion until late this year at the earliest and into 2020.
At the end of 2018, oil prices and oil stocks followed the broad market lower, with WTI crude dropped to around $50 per barrel and stocks like Halliburton Co. (HAL) extending downward trends into a long-term timeframe. HAL is the largest provider of services and equipment to the oil sector in the United States, and the 2nd largest in the world, behind only Schlumberger N.V. (SLB). Their stock price has dropped since the beginning of 2018 from a high at around $58 to a low point in December near $25 per share. The stock is currently just a couple of dollars above that low, which means that it remains more than 50% below that 2018 high. The company has been putting a lot of capital investment into projects in the Permian Basin, and so a lot of analysts that follow the stock aren’t HALcting to see a lot of growth this year, but are forecasting bigger long-term improvements in the company’s bottom line in 2020 and beyond. Does that mean HAL is a stock at a discount you should take advantage of now?
Fundamental and Value Profile
Halliburton Company provides services and products to the upstream oil and natural gas industry throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production throughout the life of the field. It operates through two segments: the Completion and Production segment, and the Drilling and Evaluation segment. The Completion and Production segment delivers cementing, stimulation, intervention, pressure control, specialty chemicals, artificial lift and completion services. The Drilling and Evaluation segment provides field and reservoir modeling, drilling, evaluation and wellbore placement solutions that enable customers to model, measure, drill and optimize their well construction activities. It serves national and independent oil and natural gas companies. As of December 31, 2016, it had conducted business in approximately 70 countries around the world. HAL has a current market cap of about $24.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased by more than -22.5%, while revenues were most flat, but negative, at -.07%. The pattern continued into the last quarter, as earnings declined by -18% while sales decreased -3.82%. Despite the negative earnings pattern, the company’s margin profile appears be improving, since Net Income as a percentage of Revenues increased in the last quarter to 11.18% versus 6.9% over the last twelve months.
Free Cash Flow: HAL’s free cash flow is healthy, at $1.349 billion that translates to a Free Cash Flow Yield of 5.6%.
Debt to Equity: HAL’s debt to equity is a bit high at 1.09, but it has declined over the last two quarters. The company’s balance sheet shows a little over $2 billion in cash and liquid assets against about $10.4 billion in long-term debt. Their solid cash position, along with their healthy operating margins means that HAL should have no problem servicing their debt while at the same time maintaining healthy liquidity.
Dividend: HAL’s annual divided is $.72 per share, which translates to a yield of about 2.58% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for HAL is $10.94 and translates to a Price/Book ratio of 2.54 at the stock’s current price. The stock’s historical average Price/Book ratio is 3.22, which puts a target price for the stock at about $35 per share. That is a little more than 26% above the stock’s current price, which is very attractive. If you forecast out over the next couple of years, the stock’s 2018 highs aren’t out of the question, since the stock is also trading more than 50% below its historical Price/Cash Flow ratios.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last two years of price activity. The red diagonal line traces the stock’s downward trend since January 2018 to its bottom in December of last year. That line also informs the Fibonacci retracement lines shown on the right side of the chart. After rallying at the beginning of the year, the stock has dropped off of its pivot high at around $32 to its current level a bit below $28 per share. Immediate support is at the stock’s trend low around $25 per share. The stock would have to break above that pivot resistance, to $33 to maintain any of the bullish momentum it built up at the beginning of the year. If the stock breaks below support, its next support would be around $20 – a level the stock hasn’t seen since mid-2010.
Near-term Keys: HAL isn’t offering a good opportunity for either a bullish or bearish short-term trade right now; but it is within shouting distance of useful signal levels in either direction. A push to $33 would be a good signal to buy the stock or use call options with a useful target around $35, both from the stock’s Price/Book discount as well as resistance from the 38.2% retracement line. If the stock breaks down below $25, you could consider shorting the stock or using put options with a target price around $20. Even if the stock doesn’t build sustainable short-term momentum and tests its December or low moves lower, I think the stock’s fundamentals are strong enough, and the value proposition compelling enough, to seriously think about taking a long-term position.