Halliburton Needs Drivers of Growth


NEW YORK (TheStreet) -- Since reaching a high of $43.96 in February, shares of Halliburton have been in a holding pattern -- zigzagging down and up, but not really going anywhere.

However, that's not to suggest that the stock has underperformed. In fact, it's done the opposite, as shares are up more than 20% on the year. Since shares reached a low of $29.83 in November, Halliburton has soared more than 40%. Investors want more. But given the uncertainty that still remains within the oil service industry, pinpointing the stock's next move is not easy.

What's more, even if the sluggishness in rig counts have bottomed, as industry experts believe, there's still the issue of Halliburton's valuation to deal with. The stock's not cheap. More specifically, how much more upside can there be given the enormous run that stock already has been on? To that end, the first-quarter results, although decent, didn't signal a strong buy.

The Quarter That Was

There wasn't much to be excited about in Halliburton's first-quarter results. That said, these performances, along with those from rivals like Schlumberger and Baker Hughes , need to be kept in the context of the overall industry, which has been marred by slumping oil prices.

In that regard, management deserves some credit for what was actually pretty decent results relative to expectations. Revenue rose slightly to $6.97 billion. Bears will argue that this was less than 2% year-over-year growth, while falling 4% sequentially.

While this might be true, Halliburton still managed to beat Street estimates of $6.88 billion. The rest of the results, however, were mixed. Some arrived as surprises while others didn't. For instance, that Halliburton did so poorly in North America was a bit of a letdown. This is despite margins arriving very strong.

Granted, weakness in North America has been an issue for some time. But Halliburton showed some signs of improvement in the fourth quarter. So an 11% drop in revenue, which came in at $3.71 billion, was also a disappointment. It's hard to fall in love with the stock at these levels, especially given Halliburton's 43% drop in operating income.

The company said that the decline in profits, which amounted to a loss of 2 cents per share, was due to $637 million in charges stemming from the company's role in the Gulf of Mexico oil spill. However, when adjusting out these expenses, Halliburton posted adjusted earnings of 67 cents per share, which was enough to beat consensus estimates of 57 cents.

International Business Looking Strong

The earnings-per-share beat was helped by better operating income in North America, which grew 30% sequentially. Likewise, the company benefited greatly from a 21% surge in its international business, which included double-digit performances across all geographies. This is even though international margins weren't as impressive as in North America -- albeit in line with expectations.

Since posting a 5% revenue decline in international business in the third quarter, Halliburton's management has now posted two consecutive quarters of 20% revenue increases in international markets, which affirms that Halliburton is gaining traction against Schlumberger.

Clearly, the company's new focus on international markets is working well --much more quickly than even the company expected. Still, this doesn't erase concerns about prolonged weakness in North America, especially because Halliburton has more North American exposure than both Baker Hughes and Schlumberger.

What About the Stock?

I've always liked Halliburton. This is despite Schlumberger tending to get most of the media praise. In fact, I believe the company is now in one of the best positions it has ever been, given how well management is performing internationally. The question, though, is to what extent have rig counts bottomed, and what will be the next drivers of growth?

It's worth noting here, however, that this is more of a question about Halliburton's valuation than it is about execution. Investors need to decide if now is the right time to enter the stock. I don't believe it is. On a long-term basis, I think the stock should do well. But if oil prices and rig counts suffer more weakness, the stock can easily lose 10%.

At the time of publication, the author held no position in any stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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