There’s More Pain Ahead for Halliburton Stock in the Coming Quarters

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When Halliburton Company (NYSE:HAL) reported first quarter results for 2020, CEO Jeff Miller commented that the downturn is the “most severe we have seen in a generation.” At the end of fiscal year 2019, Halliburton stock was trading at $24.47.

There's More Pain Ahead for Halliburton Stock in the Coming Quarters
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In the recent market meltdown, the stock plunged to $4.25. However, with expansionary and fiscal policy support, equity markets stabilized and the stock currently trades just below $10. I would avoid the stock after a 129% upside from the lows. This column will elaborate on the concerns.

From a balance sheet perspective Halliburton Company is well positioned to navigate the crisis. This point is worth mentioning at the onset. For Q1 2020, the company reported a total liquidity buffer of $5.0 billion, potentially sufficient for the oil field services company to see through liquidity requirements in the current year.

Additionally, the company was already in a phase of deleveraging. Total debt was $15.4 billion in FY2015 and it declined to $10.3 billion in the last financial year. With the onset of the crisis, the company has the flexibility to leverage. Another positive worth mentioning is that the company has only $1.3 billion in debt maturing through FY2024. Therefore, there is no near-term refinancing pressure.

Purely from a fundamental perspective, I like Halliburton Company. The stock is worth keeping in the investment radar, but it’s too early to consider long-term positions.

The Worst is Still to Come

For Q1 2020, WTI-oil price averaged $45.76 and Brent averaged $50.44. Even with oil prices at these levels, the company’s revenue from North America fell 25% on a year-on-year basis to $2.5 billion. International revenue declined by 5% on a YoY basis to $2.6 billion.

The point I want to make here is that WTI-oil currently trades at $17 and Brent trades at $25.50. Clearly, the worst is still to come in terms of revenue decline. Halliburton believes that North America’s exploration and production capital expenditure is headed for a 50% decline in the current year.

Even the CEO of Schlumberger (NYSE:SLB) is expecting oil field activity to decline by 40% to 60% in Q2 2020. The latest rig update by Baker Hughes (NYSE:BKR) also indicates a sharp decline in oil field activity.

Halliburton has already mentioned in their Q1 2020 transcript that “we expect activity in North America land to further deteriorate during the second quarter and remain depressed through year-end.”

Overall, the coming quarters will be challenging for Halliburton and I expect sharp decline in revenue from North America.

Further, oil business intelligence firm Rystad Energy believes that global exploration spending will decline to a 13-year low for FY2020. Capital expenditure is expected to drop by 17% as compared to the prior year. The negative impact on international revenue is therefore yet to be seen. Renewed correction is likely for Halliburton stock as weak numbers are reported in the coming quarters.

Positive Fundamental Factors

Looking at the positives, Halliburton has taken aggressive measures to cut cost. The company’s capital expenditure for the year has been reduced to $800 million. This is 50% lower as compared to the prior year.

Further, the company expects to reduce overhead and other costs by $1.0 billion. Focus on working capital improvement is likely to translate into positive operating cash flows even in the crisis. For Q1 2020, the company did report operating cash flow of $225 million.

According to CEO Jeff Miller:

As activity declines globally, working capital has historically been a strong source of cash and I expect a similar pattern this year. We have a heightened focus on improving working capital metrics and are working hard to prudently manage customer credit risk in light of the current market conditions.

Additionally, the company currently pays an annualized dividend of 72 cents per share and I expect that dividend to be cut or suspended relatively soon. While this move could depress Halliburton stock, it’s a positive for strong fundamentals and cash preservation.

Final Views on Halliburton Stock

From a balance sheet and credit perspective, I don’t see any investor concerns over Halliburton stock. Cost-cutting initiatives will help in conserving cash and keeping leverage low.

However, the worst for the industry is still to come. As weak results flow, I expect HAL stock to remain depressed. Additionally, its still uncertain if the headwinds impact growth will into the next year. If that holds true, the shares could witness a sharper decline.

Considering the expected revenue decline coupled with uncertainty on the timeline for recovery, I would avoid Halliburton stock. Even if there is no sharp correction from current levels, I don’t see upside triggers in the foreseeable future.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.


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