Halliburton's Pump Is Primed for $65

TheStreet.com

NEW YORK (TheStreet) -- There has never been any doubt that Halliburton , the world's No. 2 oilfield services company behind Schlumberger , has had strong operational performances. The question, though, has been whether Street expectations -- especially amid perpetual weak demand in North America -- have been too high. Given that the region accounts for roughly 50% of Halliburton's revenue, heightened pressure is on management to grow its international business.

All told, while management has done an excellent job navigating the brutal oil services industry, which has been marred by weak prices and soft rig counts, growth has nonetheless been hard to come by. However, that didn't stop me from assigning a $50 target on the stock back in August when shares traded around $46 a share. This is even though the company was coming off a quarter during which revenue grew just 1% year-over-year, the worst of the Big Three, including Baker Hughes .

Even so, what I noticed then was that unlike both rivals, Halliburton showed plenty of strength in international markets, which grew 14% year over year and 8% sequentially in the July quarter. Fast-forward four months later, the Street has finally caught on as shares of Halliburton are now trading at around $55 per share, or roughly 20% higher than my initial target. And following the company's solid third-quarter earnings report, I don't see anything standing in the way of $65 per share. Plus, this time it is the company, not the Street, that is raising expectations.

I've heard some analysts describe Halliburton's third-quarter results as "so-so" on the basis of a $60 million shortfall in revenue. But with results already in hand from Schlumberger and Baker Hughes, I was quite impressed with Halliburton's performance, both on a relative and absolute basis. First, although revenue did miss Street estimates, the 5% year-over-year should be taken in the context of the meager 1% growth in the July quarter.

Again, this is another example of how the Street's expectations have consistently been -- in my mind -- entirely irrational. It should have come as no surprise that the revenue miss, which was due to ongoing weakness in North America, was again the focal point. This has been the case for the past couple of quarters. Although the 1.6% growth was a disappointment, management made up for this with an 18% increase in operating income.

As I've said before, while it does appear that North American demand will take more time than investors would like, Halliburton management is not just sitting idle and waiting for its fortunes to turn around. This is still a highly profitable business that is still improving operational efficiencies. To that end, Halliburton's 18% year-over-year profit increase measures up very well with Schlumberger's 20% jump.

Here, too, investors should understand that Schlumberger, while impressive in its own right, does not have the level of exposure in North America as does Halliburton, which has fought issues such as oversupply -- the sort of problem that continues to pressure Halliburton's prices. Plus, North America accounts for two-thirds of Halliburton's profits. But it's all beginning to change.

As with the July quarter, during which Halliburton's management emphasized a focus to lessening this sort of dependency, not only did the company post a 13% increase in international growth, but operating income increase 20% year over year. What this means is that Halliburton's international growth is now outpacing its U.S. performance, which is precisely what investors should want to see as the diversifies the business.

What's also encouraging is that Halliburton's management recently set plans to expand the growth rate in the deepwater market by (at least) 25% over the next three years. It's worth noting here that this target is much faster than the current growth rate of the market. The industry estimates for deepwater market growth is currently at an annual rate of only 11% over the next five years.

Essentially, this time Halliburton is raising expectations. The good news is, given the company's strong position in areas like production enhancements and offshore tools, management expects strong growth in 2014. Not only has the company invested $1 billion to achieve its 25% deepwater growth rate, but the company has increased staffing by 35%. With that in mind, I see nothing but more gains ahead for Halliburton in 2014, including $65 stock price.

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

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

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