Halliburton (NYSE:HAL) is climbing along with the price of oil. As the economy continues to reopen, there is a growing sentiment that the second half of 2020 will show a vigorous recovery. Of course, that’s no guarantee that Halliburton stock is primed to soar.
I believe the market is ahead of itself. But what are investors to do? If the market is truly forward-looking, then you have to imagine that they see better days ahead. And anything that’s less bad than what the economy went through in March and April should be good for oil markets.
However, a rise in crude oil prices, even one that brings them close to the $50 level, is not sufficient to make Halliburton stock a wise investment.
A Fair Warning and Halliburton Stock
It seems that making America energy independent came at a cost. Although oil prices were in the $50-$60 range for most of last year, many U.S. shale drillers, including Halliburton were struggling. In fact, at the end of 2019, the company posted a $1.7 billion loss.
At the time, Halliburton CEO Jeff Miller remarked that shale producers were entering its roughest period since 2015. At that time many oil companies went bankrupt, the industry saw losses that numbered in the billions of dollars, and thousands of employees were laid off as producers cut back.
But remember, he made these remarks before the Covid-19 pandemic shattered the supply and demand dynamic. And now, there are several oil companies at risk of bankruptcy, companies are losing billions of dollars, and layoffs are underway.
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 put it this way:
“Companies need to become really lean and efficient. No one foresaw oil plunge — to $20 a barrel about a month ago and for a period of time at a negative $34 a barrel. Under these conditions, you have to be willing and able to chop costs like crazy, and many companies aren’t able to do so. A lot of people in the industry were caught off-guard by that price plunge. I’ve been an expert in this area for a long time and I never thought I’d see anything like this. It’s really shocking.”
Olson, a former energy industry executive, is an expert on the cost of capital to public utilities and all aspects of public utility regulation and energy economics. He has consulted for more than 100 utilities as well as industrial companies, state agencies, trade associations and environmental groups.
The Math of Shale Is Not Working
According to Evercore ISI and the Wall Street Journal, large U.S. drillers received $819 billion in cash flow from $1.18 trillion in drilling expenses over the past decade. That’s a $350 billion donut hole that happened while oil was trading at prices that were generally no lower than $50 per barrel.
“I don’t think $30 oil saves a lot of those producers who are sitting in the emergency room on a gurney waiting on a heart transplant,” Buddy Clark, a lawyer at Haynes & Boone.
Halliburton was going to have a problem being profitable with oil at $60 per barrel. So having oil off of life support at just under $40 is no great triumph. Halliburton needs the price of oil to be much higher. And that does not appear to be the case.
This Time May Not Be Different
“This time it’s different” is a hill that a number of oil bears have died on, but in every situation, oil has come back. So I’m not ready to proclaim that oil is destined to never recover.
The market is already back into a bull market on the mere hopes that the economic recovery is underway. I hope the market is right. And if it is, then oil may climb back up as a long, hot summer progresses.
The NOAA National Hurricane Center is predicting that the United States will have an active hurricane season. Forecasters are calling for up to 19 named storms, with 10 of such storms being hurricanes.
Under normal economic conditions, a supply crimp could be a potential catalyst for oil prices. But right now, if production was shut down, would it matter? The market is amply supplied.
And as Josh Enomoto wrote for InvestorPlace, one only needs to look at the trend in jet fuel costs prior to the pandemic to support his argument that oil is facing a new paradigm.
As expected, Halliburton cut its dividend. That was prudent. But it still takes away another reason to buy Halliburton stock.
This is not to say that Halliburton will be among the companies to declare bankruptcy. They should live to see the other side of this economic calamity. But to take on this risk, investors should have more to hang their hat on then the company will survive. And in the short term, that’s the only reason to own Halliburton stock.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.