On April 20, Halliburton (HAL, Financial) announced its 1Q15 results. The company, which provides a range of services and products to the upstream oil and natural gas industry, reported decent results considering the slide in the industry in the last few quarters. This article discusses the reasons to consider gradually accumulating Halliburton at these levels with a long-term perspective.
Coming to the results first, Halliburton reported 1Q15 revenue of $7.1 billion as compared to $7.3 billion in 1Q14. Therefore, the top-line was not severely impacted even after difficult industry conditions. However, the EPS decline was notable with the company reporting an EPS of $0.49 per share (excluding special items) as compared to an EPS of $0.73 per share in the comparable period last year.
The biggest contributor to the company’s decline in revenue and operating profit was depressed sentiments in North America where activity has dropped by 50% from the peak in late November. The important point to note here is that the company mentioned in its conference call that they typically expect the market to bottom out (by historical standards) three quarters after the peak. With the market peak coming in 4Q14, the oil and gas services market should ideally bottom out by the second quarter of 2015. If this point holds true, it is a good time to invest in oil and gas services stocks.
I must mention here that the decline in rig count in North America is moderating according to the Baker Hughes rig count data. This is a further indication of the point that the market is close to bottoming out for the oil and gas services industry. Therefore, I don’t expect oil and gas services stocks to slump further unless there is a scenario where oil again drops meaningfully. I don’t expect that to happen with oil likely to consolidate at $50 to $60 per barrel range.
Among the positives, the pending transaction with Baker Hughes (BHI, Financial) is likely to enhance the company’s long-term growth potential considering the size and scale of operations post the transaction.
However, the benefit of the transaction will be visible only after the market has recovered and I believe that markets will first stabilize at current operating levels and recover depending on how soon oil prices trend higher. According to Halliburton, oil and gas companies are delaying well completion in order to wait for higher oil prices. Therefore, I don’t expect any recovery in industry prospects until oil trend above $75 per barrel or higher.
In conclusion, Halliburton has still managed to report strong results and this is an evidence of the company’s strength and scale of global operations. In my view, the stock looks good at current levels for long-term accumulation. However, investors should still avoid big exposure to the stock as the industry is not surging higher anytime soon.
