Halliburton: Can They Keep Up Their Margins?

 Ticker: HAL

Rating: Equal-weight

Price Target: $14

Target Date: 6/2021

Overview:

After hearing many of your requests to start covering new sectors (such as oil & gas), we spent the last few weeks speaking with industry experts and digging into large oil field companies. As such, we figured there was no better place to start than Halliburton (HAL). For those of you unfamiliar with Halliburton (HAL), they are one of the world’s largest oil field service companies. HAL has operations in more than 70 countries! It owns hundreds of subsidiaries, affiliates and employs over 55,000 people. We will use this piece to discuss their recent earnings announcement and how we are playing the news.

Update:

HAL beat expectations with better than expected margins and Q4 guidance was also much better than expected. HAL also reported revenues of ~$3B, EBITDA of $505M and EPS of $.11. Segment results included an EBIT beat vs. the street (in Completion & Production), but saw a miss in Drilling & Evaluation. Their management team also concluded that the pace and magnitude of their eventual recovery is likely to vary greatly by geography and customer type but they were decently honest in sharing their projections across all of their geo’s and demo’s. HAL’s management team also thinks that they are, at the minimum, several quarters away from a more macro recovery, though it does see declines in international activity slowing, and thinks that activity approaches a bottom in most int'l markets by 2H20. This is largely in line with our expectations and have usually sided with their management’s team realistic expectations.

While the above to us signals a recovery, like their team said, this is likely to be drawn out over several quarters.

Even though the market is largely discounting this in (as HAL has been a performing stock in their sector YTD), we need to see more proof towards the upside before changing our investment thesis (currently equal weight). We also feel that the substantial surprise on cost cutting has run its course, and we see some risk that margins may disappoint from here if NAm remains stuck in low gear. As such, we are continuing to watch the macro and micro here and will update accordingly. We see the stock bouncing back and forth between our price target for some time to come.