Is the time right to jump in on HAL’s value proposition?

A little over six weeks ago, I wrote about HAL in this space, using the stock to analyze the potential opportunity a narrowing spread between the prices of West Texas Intermediate (WTI) oil and Brent crude could represent. At the time, and through a big portion of September, pressures from Permian pipeline restrictions (which are still a factor in U.S. crude production, and will continue to be into 2020 as new projects are finally brought online), along with geopolitical tensions associated with alleged Iranian attacks on Saudi Arabian oilfields kept a lid on stocks in the oil industry.

HAL has seen a lot of pressure that has translated to its bottom line from a variety of pressures over the past couple of years; trade tensions have played a role, as well as the aforementioned pricing pressure and ongoing geopolitical uncertainty in the Persian Gulf. HAL is the 2nd largest producer of crude in the U.S., with heavy investments in the Permian basin. In fact, the company has been investing heavily in the area, which is part of the reason some of the fundamental measurements I generally like to pay attention to are seeing less-than-favorable patterns right now, and certainly has played a role in a downward trend for HAL that extends back to the beginning of 2018.

Besides the company’s strong U.S. presence, of U.S. producers it is also one of the most diversified, with a strong focus on extending its operations into the Middle East and other frontier markets where profit margins are larger under current conditions than in the U.S. That’s part of the reason that recent uncertainty in the Middle East helped the stock rally from a trend low at around $17 to push up to a short-term high at nearly $23. The stock has dropped back below $19 from that point, and appears to be seeing a new surge in bearish momentum that could see the stock test its trend low.

Part of the interesting thing about value-focused investing is that sometimes the best opportunities come before indications are entirely clear that things are going to get better. However, as we move later into 2019, indications are that the long-term forecast for HAL is much stronger than it has been. The fundamental measurements still point to problems, even in its recent past, that aren’t entirely resolved as of yet. That said, the stock’s drop to lows that haven’t been seen since the Great Recession that began in 2008 seems to signal an opportunity that an attentive value-oriented investor would be smart to take seriously.

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 $16.5 billion.

Earnings and Sales Growth: Over the last twelve months, earnings decreased by more than -39.5%, while revenues also negative at -.3.5%. In the last quarter, earnings improved by 52% while sales increased a little above 3%. HAL’s margin profile is a concern, since it has been narrowing significantly throughout the year. In the last twelve months, Net Income as a percentage of Revenues was 5.57%, but was only 1.26% in the last quarter.

Free Cash Flow: Like Net Income, HAL’s free cash flow is declining significantly, at $415 million – a drop of about -$900 million since the end of the first quarter of this year. From a Free Cash Flow Yield standpoint, that translates to just 2.52%.

Debt to Equity: HAL’s debt to equity is a bit high at 1.16 and has increased in the last quarter. The company’s balance sheet shows a little over $1.1 billion in cash and liquid assets – down from $2 billion earlier this year – against about $11 billion in long-term debt. The company should have no problem servicing their debt for the time being; but given their deteriorating Net Income and Free Cash Flow, liquidity could be a concern if the pattern isn’t reversed soon.

Dividend: HAL’s annual divided is $.72 per share, which translates to a yield of about 3.84% 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 $10.87 and translates to a Price/Book ratio of 1.93 at the stock’s current price. The stock’s historical average Price/Book ratio is 3.21, which puts a target price for the stock at about $35 per share. That is a little more than 85% above the stock’s current price, which is very attractive by itself. The stock’s Price/Cash Flow ratio provides a more conservative, but still interesting target at around $30 per share, or a little more than 60% above the stock’s current price.

Technical Profile

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 lowest point reached in September. That line also informs the Fibonacci retracement lines shown on the right side of the chart. The stock has shown significant weakness since June, but rallied into the latter part of September to hit a short-term peak at around $22.50 before retracing back to its current level a little below $19 per share. The stock would need to break above previous pivot highs in July at around $23 to really offer a sustainable, short-term bullish trend to work with, and is currently just a couple of dollars above its trend low support at around $17 per share.

Near-term Keys: If the stock can find a level of support anywhere between $17 and its current price, HAL could offer an interesting opportunity for an aggressive trader to buy the stock or work with call options, with a near-term target near its recent pivot high at around $22.50. That is a very aggressive trade, however; a much better signal would be offered by a push above $23.50, with room to see the stock get to about $27.50. A short-term bearish trade, by shorting the stock or working with put options right now runs the risk of trying to scrape the bottom of the barrel at the end of a very extended downward trend, with very poor probabilities of success. The value proposition, however looks more and more attractive at the stock’s current levels. If you’re willing to work with a long-term perspective, and aren’t afraid of some short-term volatility that could persist, HAL is an interesting stock to watch.


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