So far in 2020, oilfield services firm Halliburton (NYSE:HAL) has had a year to forget. Amid the carnage in oil markets, year-to-date (YTD), Haliburton stock is down about 69%. Yet in April, the shares are up close to 20%, in part reflecting the improvement in the price of the international oil benchmark Brent Crude.
Therefore investors are wondering if this may be an opportune time to buy into the company. Halliburton is expected to report Q1 earnings in a few days.
If you are not yet a shareholder, you may want to analyze the quarterly metrics before committing new capital into HAL stock. In case of further weakness in the share price, you may consider initiating a position, especially if the stock falls toward $6. Let’s see why.
Halliburton Stock, Oil Prices and the Pandemic
Since early this year, shares of oilfield services companies have been decimated. YTD, the VanEck Vectors Oil Services ETF (NYSEARCA:OIH) has declined more than 63%.
A recent industry report defines the oilfield services sector as “an essential partner for exploration and production companies. They provide drilling, completion, production, supply, and logistical support services—both onshore and offshore.”
The woes of the sector go back more than five years. Since mid-2014, HAL and OIH are both down around 90%. In other words, if you had invested $1,000 in either one almost six years ago, now it would be about $100. But that decline does not include any dividend payments you would have received. At present, the respective dividend yields for HAL and OIH shares are about 9.4% and 6%.
In early March, we witnessed the COVID-19 outbreak hit our shores. The uncertainty has adversely affected broader stock markets as well as the price of oil and a large number of shares in the sector.
To make matters worse, March also saw an oil price war between Saudi Arabia and Russia erupt. As a result, the price of oil crashed to below $20.
Last week, several countries, including OPEC members and Russia, agreed to cut production by 9.7 million barrels a day. These cuts will occur in May and June. Then, there will be a steady increase in production. Now the price of oil is hovering around $30.
But will curbing the output be enough for the oil industry to navigate the choppy waters ahead? On Apr. 15, the International Energy Agency (IEA) said that “it expects the coronavirus crisis to erase almost a decade of oil demand growth in 2020, with countries around the world effectively having to shut down in response to the pandemic.”
So how is Halliburton management working through these difficult times? In mid-March the company announced that it would be furloughing 3,500 workers as part of steps to cut costs.
Other oil companies, like Apache (NYSE:APA) and Exxon Mobil (NYSE:XOM), have also been cutting a large number of jobs and decreasing capital spending. Later in April, management announced further job cuts and salary decreases for executives.
What to Expect From Halliburton’s Q1 Earnings
When Halliburton reported Q4 and full-year 2019 metrics in late January, results came in better-than-expected. Total revenue for the full year of 2019 was $22.4 billion, a decrease of $1.6 billion, or 7%, from 2018. Reported operating loss for 2019 was $448 million, compared to a reported operating income of $2.5 billion for 2018.
The oil giant reports revenue in two segments:
- Completion and Production (Q4 revenue was $3.1 billion);
- Drilling and Evaluation (Q4 revenue was $2.1 billion).
It also divides revenue by two geographic regions:
- North America (Q4 revenue was $2.3 billion);
- International (Q4 revenue was $2.9 billion).
“We optimized our performance in North America as the market softened, and our international business grew for the second year in a row… We delivered over $900 million of free cash flow for the full year 2019, demonstrating our ability to generate consistent free cash flow throughout different business environments,” said Jeff Miller, Chairman, President and CEO.
We do not know what the full effect of the volatility in the price of oil as well as the pandemic on the sector or on Halliburton’s revenue, earnings, and cash flow. The company has recently been taking steps to decrease costs and potentially save cash.
And the recent choppiness in the price of HAL shares has been reflecting those questions marks and investors’ mood.
Another issue that has been on the minds of Halliburton shareholders is whether the oil group may decrease or even axe its dividend. Decline in activity means lower cash flows and potentially weak earnings. So far in March and April, a large number of companies have already announced that they would be cutting dividends and stopping share buybacks.
InvestorPlace contributor Mark Hake has written a detailed piece on the prospects of the dividend. In case of such a dividend cut, HAL stock is likely to come under further pressure.
The Bottom Line on Halliburton Stock
Recent weeks have shown that economic prospects and investor sentiment can change on a dime in the oil and gas industry. And many shares in the sector, including Halliburton stock, have felt the effects of the volatility in a painful way.
As the oilfield services group gets ready to announce quarterly results, there will likely be further choppiness in HAL shares potentially with a downside bias. Long-term investors may regard any further drop in the price as an opportunity to buy the stock.
If you already own Halliburton stock, you might want to stay the course and hold onto your position. Alternatively, if you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon, i.e., June 19 expiry. Such a covered call position would offer you some downside protection. It would also enable you to participate in a potential up move.
Finally, those investors who would like some Halliburton exposure but are nervous about company specific prospects for the year may consider buying into an exchange-traded fund (ETF) that has HAL stock as a holding. Examples such ETFs would include the VanEck Vectors Oil Services ETF, the iShares U.S. Oil Equipment & Services ETF (NYSEARCA:IEZ), or the SPDR S&P Oil & Gas Equipment & Services ETF (NYSEARCA:XES).
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she holds SLB covered calls (April 17 expiry).