Although I expect oil prices to continue to rise going forward, oil services companies, including Halliburton (NYSE:HAL), will likely be meaningfully hurt in the medium term by oil and gas production cuts. Further, the valuation and dividend of Halliburton stock are not as attractive as those of the large oil production companies, including Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and BP (NYSE:BP).
Therefore, I recommend that longer term investors avoid Halliburton stock at this point.
Oil Production Cuts Will Likely Sting Halliburton
As of last week, the total number of active oil rigs stood at 199, down a huge amount from the 788 that were operating during the same period a year earlier. The number of active gas rigs, meanwhile, had tumbled to 58 from 181 during the same period a year earlier.
Given the large drop in oil and gas prices during the novel coronavirus crisis, the huge declines in the number of active oil and gas makes perfect sense. Many U.S. oil companies, including large producers like Exxon and Chevron and, of course, financially troubled firms like Chesapeake (NYSE:CHK) and Whiting (NYSE:WLL), responded to the oil price slump by slashing their production.
Halliburton specializes in selling products and services that facilitate oil and gas production. As a result, it will likely take a pretty big hit from the huge production declines that occurred in the second quarter. And in Q3, although some oil and gas production will come back online, oil and gas extraction levels will still be tremendously below those of Q3 of 2019.
The Dividend and Valuation
After Halliburton cut its quarterly dividend by 75% to 4.5 cents on May 20, the stock’s dividend yield is just 1.4%. Meanwhile, the shares have a trailing price-cash flow ratio, based on analysts’ average 2020 estimate, of 8.76.
The price-cash flow ratios of Exxon, Chevron and BP, are 10, 8.4, and 4.76, respectively. Those stocks’ dividend yields are 7.4%, 5.6%, and 10% respectively.
After Q2, the price-cash flow outlook of Halliburton is likely to deteriorate much more sharply than those of Exxon, Chevron and BP. There are two main reasons for that. First, hedging oil prices will protect the large oil producers much more than Halliburton, which doesn’t directly benefit from hedging.
Secondly, oil production increases are likely to lag oil price rebounds by at least a few months. That’s because companies will likely want to make sure that the prices remain elevated before ramping up their production.
While Exxon, BP, and Chevron will benefit meaningfully from oil price gains in Q2 and Q3, Halliburton probably won’t get a boost until Q4.
Consequently, by buying Exxon, BP and Chevron instead of Halliburton, investors can get meaningfully cheaper stocks with much higher dividend yields and significantly better medium-term outlooks.
Two Analysts Have Soured on Halliburton Stock
On May 29, Cowen analyst Marc Bianchi downgraded Halliburton to “market perform, citing valuation. He warned that the company’s Q2 EBITDA could come in further below analysts’ average estimate than that of a number of its competitors.
More ominously, on May 26, UBS analyst Amy Wong cut her rating on the shares to “sell” from “neutral.” She cited “overcapacity” in North America, “leading to downward pressure on activity and pricing,” according to Seeking Alpha. The analyst placed a $7.50 price target on Halliburton.
The Bottom Line on Halliburton Stock
After oil and natural has production was slashed in North America, Halliburton’s Q2 and Q3 results are likely to be quite discouraging.
Those interested in playing the oil price rebound are much better off buying the shares of large oil firms which utilize oil price hedges and will benefit sooner from an oil price rebound than Halliburton. Further, the oil majors’ valuation and dividends are far superior to those of Halliburton stock at this point.
As of this writing, Larry Ramer owned shares of BP. Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been airline stocks, oil stocks and Snap. You can reach him on StockTwits at @larryramer.