Although fossil fuels appear to be on the way out, they’ll probably stick around for a lot longer than anyone possibly could imagine. That’s good news for companies like Halliburton (NYSE:HAL), which provides products and services to the energy industry, and it’s very good news for Halliburton stock.
Halliburton Is Hanging in There
I couldn’t tell you where oil prices are going to be a year from now, but I’m pretty sure the companies that haven’t gone out of business will be using Halliburton’s expertise and products.
The first-quarter results of many American companies showed that their business models have developed some cracks. Halliburton is in that category.
InvestorPlace columnist Nick Clarkson reported in his April 20 column that the company had reported a Q1 net loss of $1.02 billion on$5.04 billion in revenue. Its revenues sank 12.2% year-over-year, while its loss jumped nearly eight times versus the same period a year earlier.
Excluding some items, Halliburton earned 31 cents per share, 7 cents above analysts’ average estimate. Further, its top line came in $30 million above analysts’ average outlook.
The big loss had everything to do with the plunge of oil prices, caused by supply and demand dynamics; oil prices reached negative territory at one point in April.
However, both of Halliburton’s operating segments managed to deliver healthy operating margins in Q1 despite the decline of their revenue.
The Completion and Production unit’s revenue declined 19% to $3.0 billion, yet its operating income fell by just 6%. This means its operating margin in Q1 2020 was 11.5%, 1.6 percentage points higher than a year earlier. Drilling and Evaluation reported little YOY change in its revenues, which came in at $2.1 billion, and a 76% increase in its operating income to $217 million.
“Both our divisions delivered strong margin performance in the first quarter,” said Halliburton CEO Jeff Miller. “Our first quarter results demonstrate that the Halliburton team is well prepared to adjust and deliver under any market conditions.”
We’ll have to see if Miller can pull a rabbit out of his hat in July, but it’s clear by the 30% increase in Halliburton stock over the past month that investors were more than happy with the company’s Q1 results.
The Company Seems to Have a Good Plan for This Economy
While the firm’s Q2 results will likely be worse than its Q1 earnings, it sure seems like the company has a reasonable plan to battle through Covid-19 and relatively low oil and gas prices. Halliburton has reduced its overhead by $1 billion, cut its capital expenditures by $800 million, and increased its working capital.
Haliburton’s net debt at the end of March was $9.5 billion or just 40% of its total assets. Of course, its debt can soar, but right now it appears to be manageable. In fact, the company reduced its total debt by $500 million in Q1 and extended certain maturities out to 2030.
Today Halliburton is worrying about the near-term fires it’s got to put out if it wants to survive and thrive over the next decade.
“We have been through downturns before. We know what to do and will execute based on
that experience. … We believe the actions we take will not only temper the impact of the activity declines on our financial performance, but also ensure that we are in a strong position, financially and structurally, to take advantage of the market’s eventual recovery,” Miller stated in Halliburton’s Q1 earnings press release.
Over the 12 months that ended in March, Halliburton generated free cash flow of $1.41 billion. The shares have an enterprise value of $20.6 billion and a free cash flow yield of 6.8%. That’s closing in on value territory.
And consider that its FCF yield in 2016 was 2.1%, Halliburton is a much better value play today than it was four years ago.
The Bottom Line on Halliburton Stock
If I was forced to invest in an energy-related stock, I would be inclined to buy the shares of a company like Halliburton. That’s because it will succeed no matter who the winners and losers are in oil and gas exploration and production.
I don’t know where oil prices are headed, but Halliburton seems like a smart way to bet on the industry. If you like Exxon Mobil (NYSE:XOM), buy Halliburton instead. In five years’ time, you’ll be happy you did.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.