For oil services operator Halliburton (NYSE:HAL), the third quarter was fairly lackluster. Net income fell from $683 million, or 74 cents a share, to $602 million, or 65 cents a share. When adjusting for one-time items, EPS came to 67 cents a share, which was in-line with the consensus estimate. Revenues increased by 8.6% to $7.1 billion. On the news, the shares are down 1.5% to $34.04 in Wednesday’s midday trading.
No doubt, this year has been challenging for Halliburton: Return on the stock is about break-even so far.
But might there be an opportunity for investors to get a bargain? Well, to see, here’s a review of the pros and cons:
Powerhouse. Founded in 1919, Halliburton is the No. 2 player in the global oil services industry. It has more than 70,000 employees across 80 countries delivering a fully integrated suite of services, such as well completion/construction, geological analysis and drilling/formation evaluation.
International Strategy. Over the years, Halliburton has invested heavily in other countries. And it’s certainly getting results. In the latest quarter, it showed growth in places like Mexico, Brazil, Russia, Malaysia and Australia. Halliburton is also likely to get a boost from Iraq, as its oil industry starts to grow again.
Solid Financials. Halliburton continues to produce strong operating cash flows, which came to $1.9 billion for the first nine months of this year. And yes, the company has been able to put the money to work on acquisitions. Some of the recent deals include the purchase of Petris Technology (a supplier of data-management and integration solutions) and Old School Services (which is a provider of tubing equipment).
Energy Prices. Over the past couple months, crude oil price have had a big drop. A key reason is the weakening of the global economy. As a result, clients will likely push back on new oil services contracts.
Fracking Business. Halliburton is market leader in hydraulic fracturing services, which involves extracting natural gas from shale formations. The problem is the current production glut, which has put pressure on revenues. For example, in Q3 the U.S. natural gas rig count dropped 18%.
Competition. The oil services market is brutally competitive, and price-cutting tends to be the norm. Just some of Halliburton’s rivals include Schlumberger (NYSE:SLB), Weatherford International (NYSE:WFT), Baker Hughes (NYSE:BHI) and Core Laboratories (NYSE:CLB). In fact, competition is emerging from China, which has the advantage of government support and lower wages.
So far, Halliburton’s shares are trading at an attractive valuation, with a price-to-earnings ratio of 10x.
Yet the company faces big challenges. Perhaps the biggest is the fall-off in the fracking business, which could be a drag for a while. At the same time, the weakness in crude prices will also be a factor.
So in light of all this, the cons outweigh the pros on the stock for now.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.