With oil trading in the mid-$40 range, shares of companies operating within the oil and gas industry have been brutalized, leaving some great buying opportunities for long-term oriented investors. And one of my favorite picks in the oil and gas industry right now is Halliburton (HAL).
Halliburton stock is currently trading just under $40, which is about 44% off of its highs. Despite this, Halliburton could make a move closer to those highs, low oil prices withstanding.
Recently, Halliburton made a bid to acquire Baker Hughes (BHI), which is expected to close sometime later this year.
Once the deal is finalized, Halliburton will be much better positioned, both domestically and globally, within the equipment services side of the industry, and opportunities in refracking could be a solid driver of revenue.
HAL’s Two Catalysts
The corporate synergies gleaned from the deal should help improve margins, allowing the market to value HAL stock at a higher multiple. A multiple justified by Halliburton’s fiscal year 2014 revenue of $32 billion (minus the $3.5 billion from units it’s selling) plus Baker Hughes’ revenue of $24 billion during the same year, which puts the revenue around $40 to $50 billion, taking into account estimated sales declines from lowered rig counts.
This higher revenue should help Halliburton’s cash flow, meaning the company could offer more than 1.9% yield on its dividend.
The acquisition will also transfer the current rig count data release to Halliburton. But, interestingly enough, HAL management isn’t overly concerned about rig counts in general.
Halliburton believes the more important metric to focus on is well count. With slightly more than 60% of a well’s cost realized during the fracking stage, wells can be drilled to be fracked at a later date. This provides opportunities in revenue that Halliburton could realize long before rig counts begin to rise.
Speaking of fracking, refracking could be big for HAL stock.
This is the process by which a previously fracked (and currently producing) well is once again fracked. The idea is that a refracked well will increase the well’s production level. During their most recent conference call, Halliburton and competitor Schlumberger (SLB) both commented on opportunities they are seeing in refracking.
What Halliburton and Schlumberger are offering, though, is to refrack wells at no upfront cost to the owner. Depending on the well, a refrack usually costs around $1 million, and with low oil and gas prices putting a hurting on most of the producers, Halliburton will offer financing. Refracking could become a major revenue driver both in terms of new business and from financing the project themselves.
It’s unlikely that analysts have taken the full benefit of refracking into account. So if refracking gains traction in the coming months, Halliburton stock will likely receive a few upgrades, pushing Halliburton stock higher in short order.
Final Thought on Halliburton Stock
Some expect the price of oil to fall even lower from where it is currently trading, but stage a rebound to the $50 to $60 range sometime in 2016. Even those estimates, however, are just that — estimates.
What investors who are considering going in on HAL stock (or any company in the oil and gas industry, for that matter) need to keep in mind, is that by the time the commodity moves higher, the money will have already been made by investors who bought in today. Better to get in early than too late.
As of this writing, Matt Thalman was long Halliburton stock. Follow him on Twitter at @mthalman5513.
