If the Roman philosopher Seneca was right and “Luck is what happens when preparation meets opportunity,” oil services companies are some of the luckiest players on the field. As producers race to find new onshore energy sources, demand for oil field services like hydraulic fracturing is fast outpacing supply. And top companies in the sector like Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) are well-positioned to turn their extensive preparation into big profit.
The companies support the global oil and gas industry by providing oilfield services, products and technology to major customers like Exxon Mobil (NYSE:XOM) and British Petroleum (NYSE:BP). The companies also are benefiting from a variation on the traditional oil play: The rise in oil prices has made it more profitable for oil companies to begin exploration in more challenging onshore sources, such as the Eagle Ford shale formation in south Texas.
Both companies reported some pretty lofty second-quarter earnings in July, but one big difference is the source of those earnings. Halliburton primarily cashed in on growth in North America, while Baker Hughes found a greater share of its fortune on foreign soil.
Halliburton’s second-quarter revenue was a record-high $5.9 billion, 35% above the same quarter in 2010. The company’s earnings were even sweeter: $739 million (80 cents per share), up 54% over the same quarter last year.
Halliburton’s Edge: Its strong presence in the white-hot North American market, where the race is on to find new oil and gas reserves in underground shale formations. More than $3.4 billion of Halliburton’s revenue was from its operations in North America — and the company’s operating income more than doubled in the region to $997 million.
Halliburton’s Challenge: Operating income from the company’s international operations fell by nearly one-third from the same quarter in 2010 — largely related to the Libya crisis, delays in Iraq and a slumping market in the United Kingdom, Algeria and sub-Saharan Africa. Still, the company is poised to take advantage of Europe’s quest for energy independence via clean natural gas. Halliburton recently inked a deal with Chevron for natural gas exploration in Poland; more shale contracts could come to fruition in northern Europe between now and 2012.
Halliburton just set a new 52-week high of $57.77 last week. With a market cap of $50.06 billion, HAL pays a dividend yield of 0.7%. The company has a beautiful price/earnings-to-growth ratio of 0.66 — indicating that the stock is undervalued — despite rising nearly 100% over its 52-week low of $27.36 last August. Analysts estimate HAL’s earnings growth at a whopping 62.10% for 2011.
Baker Hughes last week reported second-quarter revenue of $4.74 billion, 41% above the same quarter in 2010. The company’s earnings were $377 million (77 cents per share), up dramatically from the $93 million (23 cents per share) BHI reported for the same quarter last year.
Baker Hughes’ Edge: The company enhanced its powerful international presence last year by employing consolidation and supply chain management strategies to cost-effectively boost the company’s play — particularly in Asia and the Middle East. BHI’s acquisition of BJ Services in 2009 yields cost efficiencies and strengthens the company’s hand in North America’s natural gas opportunity.
Baker Hughes’ Challenge: That strong international presence can be a double-edged sword. Baker Hughes took a $70 million charge against its operational exposure in Libya — which pared back earnings by about 16 cents a share. The company also fell victim to a spring thaw in Canada that interrupted oilfield operations.
Baker Hughes also set a new 52-week high last week: $81. With a market cap of $32.89 billion, BHI pays a dividend yield of 0.8%. Baker Hughes also has a delightful PEG ratio of only 0.61, even though the stock has risen more than 105% above its 52-week low of $36.76 last August. Analysts estimate BHI’s earnings growth at 94.6% this year.
Advantage: Halliburton, though it’s a lot closer than it might initially appear. While there’s a lot of North American business to go around (and the region accounted for 69% of BHI’s profits last year), Halliburton is a well-entrenched competitor.
HAL also snapped up eight of the first 16 new deepwater service contracts awarded in the wake of the BP Deepwater Horizon disaster; company officials admitted that BHI was “underrepresented” on rigs now drilling in the Gulf. Halliburton also is in a good position to expand its international presence — particularly given cost efficiencies in its deepwater services. And at a bargain price nearly 28% lower than BHI, the stock may have further to fly.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
