Halliburton (NYSE:HAL) stock is up nearly 20% over the last month, and it has the legs to run further. The price of U.S. West Texas Intermediate crude oil is now over $34 per barrel. And although prices are yet to return to the levels seen before the novel coronavirus reared its ugly head, they are still moving in the right direction.
Oil stocks are justifiably up, and the shares of Halliburton are no exception. But there are other reasons why investors should be bullish on Halliburton stock.
The company has substantially cut its capital expenses and is looking to curtail its operational costs as well. At the moment, it has ample liquidity to ride out the crisis, but it’s aware that it should shore up its balance sheet further.
Oil demand is also rising with each passing day, and, as a result, so is Halliburton stock. Expect that trend to continue as we move further along the path to recovery.
First, any company that is looking to succeed in the current environment needs to have a strong balance sheet, since liquidity is king in the midst of this crisis.
Haliburton’s cash and cash equivalents stood at approximately $1.4 billion, as of the end of the first quarter. Its long-term debt stood at $9.6 billion, down almost 7% from $10.3 billion as of the end of Q4.
Meanwhile, its Q1 free cash flow came in at $12 million and compares favorably to the -$481 million of free cash flow that the company generated during the same period a year earlier.
On a negative note, its FCF tumbled 98.5% versus Q4. But that was largely because Covid-19 greatly lowered the company’s operating cash flow.
But the company has slashed its expenses, which will improve its liquidity position. Its capital expenditures fell to $213 million in Q1 versus $437 million during the same period a year earlier.
Moreover, the company slashed its dividend to 4.5 cents per share from 18 cents per share.
Cost Cutting Is Vital
Halliburton has done an excellent job of cutting its costs. As its revenues take a hit, it will be vital for it to keep chipping away at its operating expenses.
It’s heartening to see that Halliburton’s operating income did not tumble in Q1; it came in at $502 million, versus the previous quarter’s figure of $546 million.. Considering the circumstances the company finds itself in, its Q1 operating income was favorable.
The Cost Reductions Have Caused Some Pain
The company recently laid off 1,000 employees from its Houston headquarters, and more layoffs are likely on the horizon. Halliburton started the year off with 55,000 employees, and now it’s down to 50,000 workers. These moves will hurt morale, but they show that Halliburton is ready to make tough choices to preserve shareholder value.
OPEC Cuts Will Help Halliburton Stock
One major reason for the rally of oil prices in recent months was production cuts by OPEC and other oil-producing nations. Saudi Arabia, the leader of the group, said it is looking to reduce oil supplies by an additional 1 million barrels per day (bpd) starting next month. For May and June, the group’s output will be 9.7 million bpd; that’s great news for the sector and HAL stock.
Furthermore, it’s important to note that the Trump administration played a crucial role in urging the nations to make the cuts. The reductions did wonders for local crude oil prices and also underlined America’s influence on the world’s leading oil-producing countries. That kind of political leverage will come in handy moving forward.
The Outlook of Halliburton
Covid-19 will continue to affect Halliburton’s prospects going forward. Analysts, on average, expect the company’s sales to sink 32.6% this year. In addition. the average estimate calls for a 41.5% decline in the company’s sales in 2021.
Those estimates were far more bearish when oil traded at historic lows earlier in the year. Consequently, as oil prices rebound, expect the forecasts to become far more upbeat.
Oil Prices and Halliburton Are Positively Correlated
The rally of HAL stock over the last month has occurred in conjunction with the advance of oil prices. China’s oil demand is climbing, and several other economies will follow suit as things start to get back to normal. Meanwhile, the traditional summer driving season is nearly upon us, and with all 50 states moving towards opening their economies, demand for gasoline is also rebounding in the U.S.
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|USAC||USA Compression Partners LP||11.10||1.3%||18.0%||31.7%||-28.4%||-38.8%||-37.4%||1,074|
|CLB||Core Laboratories NV||19.64||-0.3%||8.7%||51.2%||-37.1%||-47.9%||-63.8%||873|
The Bottom Line on HAL Stock
To sum up, the global economy will take some time to recover. But one thing is for sure; oil demand will only rise from here on out. Investors who snap up HAL stock at its current prices will be rewarded when negative headwinds start to evaporate and its shares are riding the macroeconomic rebound.
In conclusion, Halliburton can rise tremendously, and it’s the right time to purchase this stock, in my opinion. At the moment, it offers an attractive entry point that will not be available in the future when its shares rally to pre-pandemic levels.
Although Halliburton’s shares have climbed over the last four weeks, there is still room for it to gain more ground.
Halliburton is a buy.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.