Halliburton Company (HAL) Stock Is Ready for a Comeback

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For oil services giant, Halliburton Company (NYSE:HAL), 2016 hasn’t exactly gone according to plans. The oil glut has persisted longer than anyone predicted. The lower price for oil caused CAPEX budgets to crater, bankruptcies to be filed and drilling activity to cease. And naturally, as one of the leading energy service stocks, HAL stock saw its profits basically disappear over the last few quarters.

Halliburton Company (HAL) Stock Is Ready for a ComebackBut when the oil service stock reported its third-quarter earnings on Wednesday, something magical happened for Halliburton stock. It seems that King HAL could have regained its crown.

Halliburton’s third quarter was nothing but great and officially marked a low point for the energy stock and potentially oil prices. The turnaround is at hand and HAL could be a big buy after it reports.

HAL Stock’s Problems Are Going Away

With oil touching below $30 per barrel at one point this year, the oil services sector has been hit the hardest out of any energy sub-sector. According to Halliburton, total CAPEX spending by energy producers has fallen by 45% since 2014 and the beginning of the oil price slump. Rig counts in the U.S. have plunged by 79%, while internationally, they’ve tanked by 33%.

Needless to say, when your job is to provide all the necessary services and equipment needed for drilling, any drop in rig counts or CAPEX spending is going to result in dwindling revenues and profits. During the first have of the year, HAL stock saw its North American revenues decline by roughly 50% versus a year earlier. In fact, the unit swung to an operating loss during that time.

Under that framework, Halliburton was supposed to report a massive loss of loss of 7 cents per share. That would have been down from a 31 cent gain during the same time a year ago.

But HAL — and the Exploration & Production industry — had other ideas.

Rising Oil Prices & Rig Counts

With rig counts dropping, so have supplies. The glut of crude oil in storage has continued to drop. Meanwhile, the Organization of the Petroleum Exporting Countries has realized that pumping oil for pumping’s sake is a bad idea. After state budgets have been crippled, OPEC finally came to the realization that they need to cut oil production. With that, OPEC decided to cap production at just 32.5 million barrels per day. Down from 33.2 million per day recorded in August.

All of that was reflected in Halliburton’s earnings. The firm was able to report a surprise profit of $6 million. Again, this isn’t the billions we are used to from HAL when oil prices where $100 per barrel. But it’s a very important start.

The beauty of fracking is that it’s a very quick process to stop and start. E&P firms in North America can quickly adapt to the market conditions. High prices simply equal more rig activity.

And since Halliburton’s merger with Baker Hughes Incorporated (NYSE:BHI) failed, HAL is still predominately focused on North America. In fact, during the quarter, Halliburton mentioned that its total market share in North America has never been higher. That means it’ll realize revenues and cash flows from those rising rig counts pretty much instantly. You’ll get some gains this quarter — as evident by the higher earnings-per-share amount and surprise profits.

But the real game could be next.

According to energy data/forecaster Platts RigData, West Texas Intermediate crude oil prices will average $52.18 per barrel next year. That’s a 23% jump versus this year’s average. That’s enough of a gain to boost drilling activity. Those higher oil prices next year will boost rigs in operation by 29%, while 11,151 new wells will be drilled. That’s a 25% increase over the 8,915 expected this year.

In essence, we’ve bottomed and that’s going to be reflected in earnings from Halliburton stock in the fourth quarter and so forth.

Go Time for Halliburton Stock

This could be the signal from HAL stock that we’ve all been waiting for: rising drilling activity, growing CAPEX spending and actual profits at Halliburton.

Now, Halliburton stock has risen tremendously over the last year on increasing oil prices. It was up about 36% year-to-date before investors went gangbusters over its results. That compares to only a 9% gain for the sector — as represented by the SPDR S&P Oil & Gas Equipment & Services ETF (NYSEARCA:XES). However, we now have the potential for the trend in earnings to back that gain up. Halliburton is now an actual earnings story, rather than the potential for those earnings.

For investors, that means HAL stock is no longer a trade on day-to-day oil prices but a big-time buy.

The Bottom Line: Halliburton will still report disappointing numbers come this Wednesday. However, quarter-over-quarter, those numbers will tell a different story. And that story is an improvement in rig counts and drilling activity. Investors should use the opportunity to snag up HAL stock.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2016/10/halliburton-company-hal-stock-ready-comeback/.

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