Halliburton (HAL, Financial) reported solid results last quarter with year over year growth in both revenue and profits. The result also beat the street expectations and is quite encouraging given the challenges in the prevailing oil market. The stock although behaved just like those of other companies in this industry and touched its 52-week low few days back. Investors are still not confident even as the falling oil prices continue to mount pressure. Let’s see in detail what can we expect from this stock in the days ahead.
A closer look
Its revenue for the quarter rose 14.8% to $8.77 billion from a year ago period, while earnings increased to $1.06 a share compared to 93 cents last year. Not only this, but the management cites this as a record year for both its divisions where 12 of its 13 product lines set new all-time highs. These are pretty good numbers amidst the falling crude prices and with strong financials the company seems to be on track to carry on its growth forward.
Such expectations are backed by strong moves of the company. During the quarter, Halliburton announced its plans to acquire Baker Hughes Inc for a sum of $34.6 billion, which is expected to close by the second half of 2015. The deal is significant for both the companies in the wake of falling oil prices. In fact, if the prices continue to decline oil will become too cheap forcing many companies to cease its operations. This in turn means, fewer oil rigs, ultimately affecting both its top and bottom line.
Trying to overcome the competition
And to top it, the oil service company has to face stiff competition from giant peers such as Schlumberger, putting further pressure on its financials. However, once the deal is completed it would create a behemoth capable of the challenging the industry leader. This strategic merger will allow them to keep the prices higher in the wake of declining demand.
Commenting on this deal Morgan Stanley wrote:
“We believe that the downturn may help HAL overcome antitrust hurdles, as weak oil prices push the US service market from highly utilized to overcapacity, making it harder to argue that market share power will translate into pricing power.”
It will be a matter of time to see the impact of this partnership on Halliburton.
Even on an international platform the company continues to bear the burnt of falling commodity prices. Its customers have reduced their budget and defer several of their new projects, particularly around offshore exploration. For 2015, Halliburton expects a challenging market across various regions including Europe, Africa and CIS. But it has high hopes in Middle East and Asia as recent project awards in Saudi Arabia, Iraq, the UAE, and Kuwait are all anticipated to move forward.
Conclusion
For now the market is still uncertain but the management is confident that both its team and differentiated technologies are best suited to outperform. It is hard to predict the length of any downturn but Halliburton has strong fundamentals with great financial position. It has a trailing P/E of 9.99 but its forward P/E is quite disappointing at 15.53, reflecting some weakness in the near term. Although in the long run Halliburton does seem promising but considering its present headwinds it would be prudent for investors to avoid this stock for the moment.
