This should put a smile on all you HAL investors. This article in todays Barron's. Too bad I only own a core position, if I held trading stock, I would sell the pop on Tuesday.....
If Barron's thinks HAL is cheap, do I have a list for them...
Gusher Ahead
Expect Halliburton's profits -- and its share price -- to continue
rising.
By Vito J. Racanelli
Oilfield stocks are rallying. The major energy companies will likely reopen
their wallets soon. So why do shares of Halliburton, the world's
second-largest oil-service outfit, lag? The short answer is that the
Dallas-based company gets about 70% of its revenues from the international
market, where exploration and production have yet to take off. Moreover, a
large part of Halliburton's business is in engineering and construction --
activities that traditionally begin to pay off late in the oil cycle. In other words,
the very things that are holding the stock back now are likely to power it
higher over the next 18 months or so.
That would be welcome news
for Dick Cheney, Halliburton's
chairman and chief executive,
who has seen his company's
shares go through the wringer
over the past few years, falling
from a high of 63 1/4 in
October 1997 to a low of 25 a
year later. (Recent price: 47.)
An industry newcomer when he
joined the company in late
1995, Cheney, the former Bush Administration Defense Secretary, had the
good fortune to arrive in the middle innings of an oil-service boom. So when
the price of crude nudged the single digits per barrel about 15 months ago, he
says, "I got a lot of comments from my peers" about never having experienced
a cycle bottom. "A lot of them took pleasure in watching me have to do that
for the first time," he adds of his baptism by fire in 1998-1999.
Investors, too, seem to have been consumed by schadenfreude.
You might think, for example, that if the tripling of oil prices in the past 12
months began to look sustainable, then the shares of an industry leader like
Halliburton would be among the prime beneficiaries. You also might think that
if this company had successfully pulled off a revenue-doubling merger during
the downturn, then investors would give it credit for its greater size and
earnings power when things began to look up.
You'd be wrong.
Rising crude prices translate into expanding exploration activity by the
ExxonMobils, BP Amocos and Chevrons of the world. That means fatter
profits, of course, for the drillers and the oilfield-service companies that do the
heavy lifting. And many energy service stocks have closely tracked the
upward turn in the commodity price since February 1999. Not so Halliburton.
Since that inflection point, the Philadelphia Oil Service Index is up about
155% from its lows, more than double Halliburton's 70% rise.
Now comes the test. Halliburton, which earned $155 million, or 36 cents a
share, last year on revenues of $12.3 billion (not including Dresser Equipment,
which will be sold), believes peak revenues of $20 billion are achievable
during this recovery, and operating margins should expand more quickly than
in previous upturns. As the market begins to discount for that, Halliburton
shares could rise as much as 30% or so to 65.
For one thing, an international spending snapback
is coming. "I think what we will see steadily
through the rest of this year and 2001 is an increase in [exploration and
production] spending, probably on the order of 15%-20%," Cheney says.
That's as much as twice as high as the market generally expects. But don't just
take Cheney's word for it.
John Spears, president of Spears & Associates, a Tulsa, Oklahoma-based
industry consultancy, predicts international exploration growth (outside the
U.S. and Canada) will nearly double to a healthy 6%-7% rate next year from
4% this year. He's looking for a long-lived recovery in international markets
"thanks to pretty good demand growth for services and a pretty tight market
for oil." At this stage in the oil cycle, Halliburton has other charms. Its
engineering and construction business -- about 30%-40% of sales -- is largely
tied to work on petroleum refineries, liquefied natural gas facilities and the
like, and the orders there don't start to hit the books until an upturn in the oil
cycle is well under way. Here, too, international revenues are important, as
engineering and construction projects tend to be large ones undertaken by the
integrated major and national oil companies. But just as boom follows bust,
these projects will come too.
The big oil firms have been slow to raise their spending over the past year,
Cheney explains. Uncertainty over whether higher oil prices would stick was
one reason, he notes. And the 1998-99 consolidation phase seen among the
majors also preoccupied managements with restructuring, regulatory and
organizational chores, he notes. The second half of this year and beyond,
however, promise to be a lot different.
Nor is the good news likely to end there. Mark Baskir, who manages the
Strong Limited Resources fund, says the recent commodity comeback should
stretch over several years. "We're just at the beginning of the spending cycle,"
Baskir declares, noting that exploration and production spending hit $84
billion in 1998, the top of the last cycle, compared to an expected $65-$67
billion this year.
What's more, a survey of major oil firms in March by Salomon Smith Barney
analyst Geoff Kieburtz found that the average oil price assumption used by
these companies had risen to $21.29 per barrel from $19.08 three months
earlier. That's far below the current price around $30, but it suggests that
these companies are beginning to feel comfortable with sustained high prices.
Indeed, Kieburtz now believes second-half E&P spending will increase by
16%-18% from 1999's level. John Hammerschmidt, a portfolio manager at
Turner Invesment Partners, started buying shares of Halliburton about a
month ago, as incipient signs of an international recovery became evident. The
money manager expects a big run for the stock between now and August, as
it becomes clear that oil companies will be ratcheting up their budgets
significantly.
ExxonMobil is going to have some $9-$10 billion in cash flow this year, notes
Hammerschmidt. "They have to spend some of that," the money manager says
with quiet glee. David Lesar, Halliburton's president and chief operating
officer, concurs. Big Oil shareholders are saying, " 'You guys aren't banks,' "
he explains, adding that there is "increasing pressure to spend that cash flow
or give it back in a way they might not particularly like. They'd rather put it
back in exploration, which benefits us." But even as prospects are looking up,
John Tozzi, a portfolio manager at Cambridge Investments, points out that the
traditional Halliburton discount to Schlumberger, its main rival, has widened.
He figures that peak earnings for both companies in the coming up cycle are
around $3.50 per share. Yet Schlumberger trades at $71 per share, or 20
times peak earnings, while Halliburton trades at a multiple of 13. That's a
disparity of some 35%, he adds, far higher than the historical average of
15%-20%.
Tom Medcalf, an analyst at American Express
Asset Management, maintains that Halliburton
now represents the best value among oil-service stocks, which have had a big
run this year. Halliburton, he notes, is cheaper than Baker Hughes, the third
industry heavyweight, and Medcalf argues the far bigger and more
internationally leveraged Halliburton is a better-quality stock. American
Express is also a big holder of Halliburton shares.
One should not forget that CEO Cheney smartly busied himself with mergers
and acquisitions -- including deals for Dresser Industries, Sperry-Sun Drilling
Services and Landmark Graphics -- just before and during the last slump.
Given these additions and the improving international picture, Lesar says he'd
be surprised if "our revenues didn't hit $20 billion" in this cycle, or 38% higher
than the $14.5 billion reached in 1998, the last top.
Moreover, Lesar predicts that operating margins at the Halliburton Energy
Services group -- 60% of revenues -- will "pop up every quarter this year"
from the first quarter's 3.6%. "We maxxed out in the last cycle in the
16%-17% margin range. It took us about two or three years last time to get
there." With the new acquisitions, "if we can get any help out of the
international market, I think we will get there faster," he predicts.
Both Kieburtz and Medcalf put Halliburton fair value at 63-65 in 2001. "The
company's operating leverage from the increased market activity will bring
more profits to the bottom line than the market expects," Kieburtz says.
Beyond that, he thinks the stock could hit 75-80 as investors begin to
discount a cycle top in 2003.
There are, of course, caveats to the brightening outlook for international oil
exploration. Central banks around the world are raising rates. So a so-called
hard landing of U.S. economic growth could precipitate a nasty drop in
economic growth around the world, pulling down oil demand with it.
Moreover, the always-fractious Organization of Petroleum Exporting
Countries could take a misstep. But its members are still smarting from the
memory of $11-perbarrel oil. And OPEC is constrained because much of its
spare capacity resides in Saudi Arabia.
Right now, Halliburton's international savoir-faire means little to investors
focused on North America. But the global hunt for crude will soon revive, and
Halliburton's fortunes along with it.
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