Halliburton for the Long-Haul

Halliburton (NYSE: HAL) stock has had a pretty good run thus far in 2013; investors have enjoyed nearly a 17 percent uplift.  The first quarter earnings report painted an ongoing positive picture of the industry and the company for the remainder of the year.

Halliburton Six-Month Price and Volume

In this article, let's review a few highlights from the conference call, perform some margin analysis, and offer a 2013 stock valuation exercise.

State of the Business

Despite 2012 record revenues, the preceding year was not a blockbuster for Halliburton.  A combination of factors dragged upon operating results. 

First, a first-quarter decision to purchase large supplies of guar gum (a key element in fracturing wells) at overheated prices turned out to be wrong.  The intent was to lock up enough of the material to ensure HAL customers would be served without interruption.  As it turned out, the price of guar gum fell thereafter, and shortage abated.  Subsequently, Halliburton spent the remainder of the year working off inventory.  This will continue into early 2013.

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Second, many North American clients decided to move their rigs from dry gas to hydrocarbon liquid plays.  The re-deployment created downtime and disrupted work flow.  Halliburton management made a decision to stick with their customers and follow the work versus pull up equipment and find new clients.  This hurt short-term results, but is anticipated to have a long-term benefit to the company.

Third, the BP – Macondo oil tragedy and litigation was an overhang.  While the issue has not been resolved fully, it appears that HAL will avoid huge fines and settlement proceedings.  The company had maintained it was fully indemnified via its contracts with BP.

On the other hand, Halliburton’s overseas business exceeded expectations.  The company has been growing revenues strongly in the deepwater Gulf of Mexico.  The guar gum problems had a silver lining: it encouraged the company to boost it's PermStim engineered frac fluid; with good results. 

Most importantly, corporate leadership indicated that overall business had bottomed and 2013 (particularly the second half of the year) place HAL in a good go-forward position.  They added an increased shareholder return of capital may be expected.

Margins

Halliburton tends to focus upon margins to measure their operating performance.  Operating margins and net margins are preferred. 

The following table offers recent comparative margin figures:

Halliburton Margins in Percent

Management stated they believe operating margins bottomed in the fourth quarter.  The went on to point out that normalized North American margins are about 20 percent.  For 2013, senior staff projected N.A. Margins to recover to the mid-teens.   International operating margins were forecast to margins come in around the upper-teens, while revenues should improve about 11 percent YoY.

Net margins appear to have already turned the corner, clocking in at 8.5 percent in the third quarter.  This is in part due to leadership's emphasis on keeping expenses down.  Corporate overheads are expected to be about $112 million per quarter.  This is in-line with historic trends.

2013 Valuation Targets

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Even though the stock has run up nicely, the share remain at a relatively low historic valuation. 

Let's begin by projecting this year's earnings based upon the January 25 conference call discussion and associated corporate releases.

We will begin by projecting 2013 revenues of $30 billion.  This will be split $16 billion for North America, and $14 billion for the remaining international segment.  Utilizing operating margins of 15 percent and 18 percent, respectively, offers combined operating earnings of  $4.92 billion. 

If we then subtract $450 million for corporate expenses, in-line with projections and the historic norm, Halliburton may be expected to earn $4.47 billion pre-tax.

Using a 29.5 percent corporate tax rate, we end up with net income after tax of $3.15 billion. 

Assuming approximately 920 million shares outstanding, we arrive at a projected 2013 EPS of $3.40.  

Caveats: These figures are only as good as the inputs.  Most were gleaned from management comments on the conference call.  However, many of the inputs are provided in a range, not a point-source.  I generally assumed the mid-point of the range.  There is no assurance the company will meet these figures.

It should also be noted that management has not missed a consensus Street EPS projection in over four years.  My 2013 EPS view is admittedly optimistic.  My estimate matches the high end of Wall Street analyst projections.  The average earnings estimate is $3.00.

Finally, to reach a price target we need to apply an earnings multiple. 

Please find below a F.A.S.T. Graph for Halliburton stock over the past ten years.  The normalized P/E multiple as a function of operating earnings (before extraordinary items) has been 16.6X over the decade span.  The current P/E ratio is 13.5X. 

Using this data, I suggest a 2013 multiple of 15X is reasonable.  It is conservatively below the mean and may somewhat offset my more aggressive earnings projection.

Therefore, I place a $50 per share price target on Halliburton stock.

Good luck on all your 2013 investments.  Do your own due diligence and always make an informed decision.

By. Ray Merola

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