Halliburton’s HAL shares have been in the red territory for a while now, as is evident from the stock’s plunge of more than 50% over the past year, underperforming the broader industry’s 20.4% decline.
In the past three months itself, the oilfield service provider fell more than 20%. The stock, which closed at $22.51 yesterday, is quite close to its 52-week low of $20.98. While the company is currently weighed down by conservative spending by North American producers and Permian pipeline pinch, we believe that the Zacks Rank #3 (Hold) firm still holds much promise and should be retained for long-term prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
What’s Going Against Halliburton?
Conservative spending by U.S. oil explorers after the crude crash toward the end of last year has dented demand for oilfield services players. With lower capital spending, the number of rigs employed in the domestic plays is reducing by the day. In fact, rigs engaged in exploration and production of oil and natural gas in the United States totaled 967 in the week ended Jun 21, per data provided by Baker Hughes, a GE company BHGE. Notably, the tally has dropped in 10 of the past 11 weeks. The tight capex budget of U.S. explorers is reducing the demand for oilfield services and creating pricing pressure, particularly in North America.
Being the largest hydraulic fracturing provider in North America with primary focus on the Permian Basin, the company is more vulnerable to the lack of takeaway capacity in the region. Moreover, there is a record backlog of drilled but uncompleted wells in the Permian Basin, signaling a slowdown in well completion activity.
Hopes of a Turnaround
Despite conservative capital spending by U.S. explorers and producers, production volumes of oil and natural gas continue to increase. EIA expects output to rise by 1.43 barrels per day (bpd) in 2019, up from 1.35 bpd projected earlier, signaling more work for oilfield services players. While North America is expected to witness lower activity levels amid explorers’ tight budget, offshore and international prospects are showing signs of improvement.
Notably, Halliburton’s international operations are picking momentum with increased work completions and higher stimulation activity. The company, which is witnessing broad-based steady recovery in the international business, anticipates international revenues to grow at a high single-digit rate in 2019, with further improvement next year. The firm expects international growth, particularly in Brazil, Mexico and the Middle East, to surpass the United States in the next few years.
In addition to international recovery, Halliburton is experiencing a rebound in the offshore business as project economics start becoming attractive. Notably, the Big Oil firms are likely to green light 110 offshore projects in 2019, up from 96, 62 and 43 in 2018, 2017 and 2016, respectively. The company's offshore business lines should benefit from these trends and new land contracts, which are usually highly profitable and have long cycles.
Importantly, in the last earnings call, Halliburton suggested that the worst is over for the domestic market, as far as pricing weakness is concerned. After losing pricing power post crude downturn in mid-2014, oilfield services players seem to be gaining lost ground primarily on the back of sector consolidation. In this regard, C&J Energy Services CJ and Keane Group Inc. recently announced a merger agreement to improve pricing power. Per Rystad Energy, big oilfield services players like Schlumberger SLB and Halliburton have already begun raising prices for products and services. This is expected to boost their earnings going forward.
Halliburton is looking to continue its disciplined approach to capital spending and improve efficiency for generating strong cash flow from operations.The company generated a combined free cash flow in excess of $1 billion in 2018.We expect Halliburton to generate higher free cash flow in 2019.
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Halliburton Company (HAL) : Free Stock Analysis Report
Schlumberger Limited (SLB) : Free Stock Analysis Report
Baker Hughes, a GE company (BHGE) : Free Stock Analysis Report
C&J Energy Services, Inc. (CJ) : Free Stock Analysis Report
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