In terms of revenues, Halliburton Company (HAL) is the second-largest oilfield services company in the world behind Schlumberger Limited (SLB). The Texas-based corporation serves oil companies involved in the exploration and production (E&P) of crude oil and natural gas all over the world. Its customers range from E&P companies like ConocoPhillips (COP), to integrated oil companies and state-owned entities like Chevron Corporation (CVX) and Petróleo Brasileiro Petrobras SA (ADR) (PBR).
Halliburton’s Business Segments – An Overview
The company divides its operations into two segments: Drilling and Evaluation (D&E), and Completion and Production (C&P). The D&E segment deals in the first phase of Halliburton’s overall operations; i.e., in activities like field evaluation and modeling, drilling, and wellbore construction. The C&P segment, on the other hand, develops proven reserves, which includes cementing drilled wells, extracting energy resources, and monitoring production.
Halliburton’s Revenues and Operating Income
Halliburton’s revenues were up 3.2% on a year-over-year (YoY) basis at the end of fiscal ’13 (FY13; ended December 31, 2013), totaling $29.4 billion for the year. The increase in the company’s overall revenues was largely attributable to a 6.5% increase in revenues from its Drilling and Evaluation segment, which generated $11.9 billion during the year. The company’s Completion and Production business, on the other hand, reported a modest 0.72% increase in revenues. It reported sales of $17.5 billion for the same time frame.
FY13 was a slower year compared to how Halliburton has been performing over the past few years. In the three years through FY13, Halliburton’s revenues have compounded at a much faster annual rate of 17.8%. Moving forward, analysts estimate an 8.1% increase in FY14 revenues, and a further 9.7% increase in FY15.
Even though revenues increased, the company’s operating income declined 24.5% to $3.14 billion in FY13. It would have been higher by $1.5 billion, though, had the company not booked contingency losses related to the Macondo oil spill, and related restructuring charges pertaining to severance and asset write-offs.
Operating margins for the company, too, had contracted 1.9 percentage points (ppts) from 9.1% at the end of FY12 to 7.2% at the end of FY13. The company expects its margins to remain unchanged in the first half of FY14, but says improved activity in on-shore and off-shore drilling in the Eastern Hemisphere (Europe, Africa, and CIS plus the Middle East and Asia) in the second half of the year will lead to an expansion in margins by the time the year ends.
Setting Halliburton’s one-off losses aside, Bidness Etc continues to be bullish on the stock. Here are the reasons why:
1. Halliburton’s Geographic Diversification
The company has operations in four different geographic regions: North America, Latin America, Europe, Africa and Russia, and the Middle East and Asia. The company is therefore sufficiently diversified to take advantage of the shale revolution in North America, and conventional drilling activity in the Middle East.
Halliburton generated the bulk of its revenues (51.7%) from operations in North America in FY13. The Europe, Africa and Russia segment brought in 17.8% of the company’s total revenues the same year, while the Middle East and Asia segment brought in 17.2%. Latin America chipped in with 13.3% of the company’s FY13 topline.
We expect the company to see revenues from North America rise rapidly, given the increased drilling activity in the region and a rise in the number of companies pursuing unconventional exploration techniques. North America has been one of the fastest growing regions for the company, with revenues generated there compounding 19.9% over the last three years.
On the other hand, Halliburton’s businesses in Latin America have seen revenues compound at an annual rate of 20.6% over the three years through FY13 – the highest rate of growth recorded in all regions the company operates in. Increased drilling activity in Brazil during the period has been the main driver behind the company’s strong performance in the region.
The Middle East and Asia segment has seen revenues compound 19%, while the Europe, Africa and Russia region has seen revenues compound 10.1% over the same period.
North America contributed around 55.4% ($2.57 billion) of the company’s operating income (without adjusting for the $1.5 billion write-off) in FY13. It was followed by the Middle East and Asia segment, which contributed 18.6% of the company’s total income on the back of the highest margins among all regions. Europe, Africa and Russia contributed $690 million or 14.9% of Halliburton’s earnings that year, while Latin America contributed $518 million, or 11.1% of the company’s earnings.
The Latin America segment has seen earnings compound at the highest rate (21.3%) in the last three years. However, this year will be challenging for the company in that region, as Petrobras, the Brazilian national oil company, is expecting its rig count in 2014 to be lower than 2013 levels. This signals that the company may not be able to maintain its earnings growth rates in Latin America, since demand for its services is expected to be lower.
The Middle East region is 88 basis points (bps) behind Latin America in terms of earnings growth rates, with earnings there having compounded 20.45% in the past three years. Earnings from the North American region have compounded 16.18% during the same period. The Europe, Africa and Russian region has seen the slowest growth, with earnings from there compounding 5.72% only during the period being referred.
2. Halliburton’s Strong Shareholder Returns
The company reported annual net income of $2.13 billion for FY13, of which it paid $465 million in dividends. The company had increased its annual dividend for the year by 39.2%.
The company’s annual dividend has been increased by an average 15.2% each year in the past three years, which suggests that the company consistently returns value to shareholders through cash payouts.
Going forward, analysts expect the company to report net income of $3.37 billion, and the company has guided that it wants to pay out at least 15% to 20% of its income to shareholders. This will translate into significantly higher dividends going forward.
During FY13, the company also completed share buybacks worth $4.4 billion. Going into FY14, the company still has $1.7 billion remaining in an authorized share buyback program.
Shareholder returns in FY13 through dividends and share buybacks totaled 10.1% of Halliburton’s market value at the end of the year. Going forward, the company will be able to sustain shareholder returns with improvements in its free cash flows (FCF), as its cash flows from operations are forecasted to improve with the increase in the company’s net income, and capital expenditures (capex) are expected to be maintained around current levels.
3. Halliburton’s Sell Side Expectations
Of 36 analysts who cover the stock, 28 have given a buy rating and a mean 12-month target price of $64.11, which represents potential upside of around 13% in its current price. Barclays plc (BCS) is the most bullish on the stock, having given it a target price of $81.
Amongst all the analysts that have provided a target price for the stock, analysts at Guggenheim Securities LLC are the most bearish, having given it a target price of $50.
Amongst established sell-side analysts, analysts at JP Morgan (JPM) have given a target price of $77 for the stock, while analysts at Goldman Sachs (GS) have given it a target price of $65. Credit Suisse (CS) has given a target price in the middle of those two estimates, estimating that Halliburton shares will touch $70 in the next 12 months.
4. Halliburton’s Comparable Valuation
Halliburton is currently trading at a price-to-earnings (P/E) multiple of 13.7x, which is a premium of 21.2% to its three-year average P/E of 11.3x.
However, the company’s closest competitor and industry leader, Schlumberger, is trading at a P/E multiple of 15.8x, which means that Halliburton stock is currently trading at a 13.3% discount to its nearest rival. Schlumberger’s earnings are expected to grow 20% in the next year, which is 6 ppts lower than Halliburton’s expected earnings growth rate. That signals large upside in Halliburton’s stock price.
Also considering that Halliburton stock is currently trading at a 14.4% discount to the S&P 500 index, it seems to be a very cheaply valued stock.
The Houston-based company’s stock price has increased 9.2% since we gave a buy call on it on October 18, 2013. Halliburton has been able to outperform the S&P 500 ETF (SPY) by 0.5 percentage points (ppts) over that period, and also the Oilfield Services Industry ETF (OIH) – which seeks to replicate the performance of 28 companies in the oilfield services industry, and has seen its price decline 1.6% during the same period.
It has also outperformed Schlumberger by 7.6 ppts and Weatherford International (WFT) by 3 ppts in the period under discussion. The stock has been outperformed only by Baker Hughes Incorporated (BHI), by 13.1 ppts, during the same time frame.
With Halliburton's Middle East and Asia segment remaining a solid driver for earnings growth going forward, the company is expected to pay consistent and incremental dividends with increases in net income and improvements in cash flows. It also has a sizeable share buyback program already authorized, through which it will seek to retire shares through FY14. With sell-side analysts also bullish on the stock, we reiterate our stance on Halliburton and recommend it as a buy.