Be leery of value traps like Halliburton (NYSE:HAL) stock, which tempt investors with huge potential upsides only to fall short of ever-changing expectations.
Halliburton shares have been in freefall since antitrust regulators blocked the company’s $28 billion merger with rival Baker Hughes (NYSE:BHI) in 2016 because they claimed that combining the second- and third-largest players in the market would have harmed consumers.
When the companies scrapped the deal on May 1, 2016, HAL stock had an adjusted closing price of $38.26. Those same shares recently changed hands at $8.21, a 17% discount to the average 52-week price target of $10. HAL stock has plunged nearly 70 percent since the start of the year.
A few things have happened since the Halliburton-Baker Hughes deal was scrapped. First, the shale boom that fueled the rise in the oilfield services sector thanks to hydrofracking earlier in the decade has largely fizzled out. Halliburton is the top provider of equipment used in the controversial technology.
Hydrofracking made previously uneconomical oilfields worth exploiting, enabling the U.S. to surpass Saudi Arabia to become the world’s largest crude producers.
Supply Glut Depresses Prices
Oil prices also have tanked thanks to a supply glut. According to the U.S. Energy Information Administration (EIA), prices for West Texas Intermediate (WTI) Crude ended 2016 at $53 per barrel. In 2020, they are expected to average $29.34 largely thanks to the economic contraction caused by the coronavirus pandemic. The EIA expects prices to bounce back to $41.24 in 2021, though that may be overly optimistic since it’s unclear how the worst public health crisis in more than a century will play out.
Meanwhile, oil companies are slashing their exploration and production budgets to the bone. Exxon Mobil (NYSE:XOM), for example, recently announced that it would cut down its 2020 capital spending by more than 30% to $33 billion. Energy consultancy Spears & Associates recently forecast a 21% drop in worldwide sales of oilfield equipment in 2020 to $211 billion, its lowest level since 2005. HAL stock’s fracking revenue will drop to $4.1 billion this year, according to the company.
Halliburton’s latest earnings report was better than expected as the gains from its international business offset its losses domestically. That advantage has probably largely evaporated in the weeks since the pandemic began. Demand for crude has plunged more than 35% since the pandemic started.
Even under the most optimistic of scenarios, restarting the economy will take a while. It’s not like flicking a switch.
Haliburton’s Debt Problem
Setting aside the worst health crisis in more than a century, I have other concerns about HAL stock. For one thing, the company is drowning in red ink. It had $10.4 billion in long-term debt as of the end of last year, dwarfing its market capitalization of $6 billion. That’s never a good sign. Indeed, given its financial predicament, a dividend cut seems likely.
Even if we weren’t living in our current crazy times, I would not still recommend buying Halliburton or any other companies dependent on the oil market. It’s just so unstable.
Crude oil prices reversed their earlier gains on Monday despite what the media called “unprecedented” production cuts after traders realized that they didn’t go far enough. Finding the right supply/demand balance is going to be tricky.
Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He’s luckier with his investments than his beloved yet underachieving Philadelphia sports teams. As of this writing, he did not hold a position in any of the aforementioned securities.