The energy sector is showing some signs of life. The price of oil recently climbed back to $40 and many energy stocks are going back up with it. Halliburton (NYSE:HAL) shares are no exception. Its shares have tripled off the March lows. That said, Halliburton stock is still way down from where it was in recent years.
In fact, in March, Halliburton had a historic fall. It plummeted to its lowest levels since the 1980s. With oil briefly slipping below $0 per barrel, there was full-on capitulation in the oil space.
Unlike many production companies, the oil services companies are in better shape to survive an extended energy slump. That said, at a low enough oil price, even service companies can get into big trouble. So were investors too optimistic on Halliburton in the past, or too pessimistic in March? It’s some of both, and here’s why.
Halliburton Stock: The Oil Services Difference
A key point to consider is that oil services companies don’t have raw commodity price exposure. After all, they make contracts with oil companies to do work for them. They will only do so at rates that generate profits.
Now, to be sure, Halliburton can (and has) lost money during the downturn. It had far too many employees and equipment on hand given the rapid decline in demand. That said, these are fixable problems, whereas low oil prices are a more intractable issue.
Even during the downturn, Halliburton remained profitable on an operating basis. Just in the course of performing its basic servicing work for clients, it continued to produce gains. Now, after interest and other expenses, it still lost money on an earnings per share level. But these were and are manageable losses.
That’s in contrast to producing oil at $50 per barrel, selling it at $25 and then having to pay overhead, interest and other expenses on top of that. Long story short, an energy bust wipes out E&P companies like Chesapeake (NYSE:CHK) or Whiting (NYSE:WLL) whereas it merely damages the stronger service companies like Halliburton.
It Won’t Be An Overnight Recovery
InvestorPlace spoke with Charles Olson, professor of the practice in the logistics, business and public policy department at the University of Maryland’s Robert H. Smith School of Business. Olson also previously served as an energy company executive. So he knows better than anyone what’s going on. He told us, via e-mail, that:
In a market glutted with oil, you use up what you have and stop investing. This hurts a lot of companies and their workers who are in the business of being suppliers to the big oil companies. Think of companies like Baker Hughes (NYSE:BKR), Halliburton and Schlumberger (NYSE:SLB). These represent offshore drillers that provide jobs that pay pretty well but are being eliminated with the tremendous plunge in the price. Moreover, the demand for oil has been eviscerated by Covid-19 and all kinds of support jobs in the oil industry go away.
Olson makes a great point. While the price of oil has started to recover a bit in recent weeks, there’s still a huge glut overall. It will take awhile for the existing supply to work through the system before demand for new oil drilling really comes back.
Examining the Power of Halliburton
During the March crash, Halliburton stock reached a low of $4.25. In the subsequent rally, shares hit $16. Interestingly, it spent the most time at the midpoint of that range; Halliburton traded around $10 for much of April and May.
And now that the recent euphoria in both the broad market and oil in particular is seemingly wearing off, Halliburton stock should settle back around the $10 mark.
At $10, the company’s equity would be worth around $9 billion. Historically, in its last profitable year, 2018, Halliburton earned just shy of $2 per share. Before the oil crash in 2014, Halliburton tended to earn around $2 to $3 per share per year as well. Thus a $10 stock price is somewhere around 5x earnings in good years.
That’s a reasonable valuation as this is a highly cyclical company in a downswing. Halliburton has outright lost money in 2015, 2016, 2017, and 2019, after all. Investors aren’t going to assign a high valuation to a company which only earns profits sporadically.
The Verdict on Halliburton Stock
Halliburton stock isn’t my favorite oil services play. In a crushing sector downturn like this, buying the biggest player is typically the safest route. In this case, that’s Schlumberger, which has the bigger balance sheet and more diversified operations.
However, if you’re bullish on oil turning back up heading into 2021, there’s plenty of room for Halliburton to work as well. Unlike many of the zombie oil and gas production companies, Halliburton has a fighting chance. The company was strongly profitable as recently as 2018 and isn’t losing huge sums of money now.
There’s no guarantee that its turnaround will succeed, but it could be worth a shot. Particularly if Halliburton stock dips back under $10 in coming days, it could be worth a buy.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned Schlumberger stock.