On May 24, Zacks Investment Research downgraded oilfield services provider – Halliburton Co. (HAL) – to a Zacks Rank #3 (Hold).
Why the Downgrade?
Halliburton has operations in over 70 countries, with approximately 40% of its total operating income coming from international markets. As such, the company is exposed to risks associated with doing business abroad, which include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment, etc.
Moreover, we remain concerned over the ensuing uncertainty regarding Halliburton’s potential liability exposure to the Deepwater Horizon rig disaster. A final assessment report issued by the federal government in Sep 2011 blamed the company for the ‘poor cement job’ that allowed the oil/gas to burst through the reservoir and reach the rig, causing the explosion. We believe that this has raised the probability for Halliburton to share at least a portion of the spill liabilities with British energy giant, BP plc (BP).
Additionally, the new environmental regulations for hydraulic fracturing (or fracking) in the shale plays could adversely impact the company, as it will force Halliburton to reveal the structure of its fluids. In all likelihood, this will also wipe out its competitive advantage in the high-end pressure-pumping market.
Moreover, the North American land rig count may remain flat in the near future as growth in the highly-productive horizontal drilling has led to a natural gas supply overhang and relatively weak natural gas prices in the U.S. Hence, we believe that a slowdown in U.S. land drilling will impair Halliburton’s business.
Stocks to Consider
In the oil field services sector, two firms that are expected to significantly outperform the broader U.S. equity market over the next one-to-three months are Exterran Holdings Inc. (EXH) and Compagnie G (CGG). Both the firms currently retain a Zacks Rank #1 (Strong Buy).
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