HAL - Halliburton's Rise: Riding The OPEC Wave

2023-10-20 10:21:27 ET

Summary

• Halliburton stock has seen a 45% increase in value over the past year, despite falling commodity prices.
• The investment thesis was based on production cuts, which have created favorable conditions for Halliburton.
• The stock's performance has exceeded expectations, excluding dividends.

When I penned this article on Halliburton (HAL), the stock was navigating a challenging phase, primarily attributed to declining commodity prices. My core investment premise hinged on the belief that production cuts would carve out a more favorable environment for Halliburton in the ensuing years. Looking back, this prediction has borne fruit impressively, with the stock surging by approximately 45% since I first took my position about a year ago- and that's without factoring in dividends.

In the Eye of OPEC's Storm

The move is largely due to the favorable production cuts by OPEC to support oil prices in the face of a potential fall in consumption due to a global slowdown.

The global energy narrative took a compelling twist as Saudi Arabia and Russia confirmed their decision to extend voluntary oil production cuts, removing a consequential 1.3 million barrels of crude per day from the global market.

The cuts saw Brent crude prices surge past the $90-a-barrel threshold-a point unseen since November 2022.

There is a strong argument that these factors, along with a possible conflict in the Middle East, will continue to drive prices higher, which will support the multi-year bull thesis I laid out in the last article. Here's what I expect:

1. Service Demand Dynamics: With the tightening of oil supply, there's potential for a short-term dip in demand for oilfield services. This could mean that Halliburton might experience a decrease in immediate project engagements.

2. Pricing Power: Historically, when crude prices soar, upstream companies tend to invest more in exploration and production. If this trend holds true, Halliburton could witness a resurgence in demand for its services and even gain leverage in pricing negotiations.

3. Geopolitical Nuances: The production cuts aren't merely economic decisions; they're deeply rooted in geopolitics. As the U.S. government navigates its relationship with Saudi Arabia in light of these cuts and Russia's actions in Ukraine, companies like Halliburton must tread cautiously, keeping in mind potential regulatory and diplomatic minefields, but it will likely see tailwinds.

A Closer Look at Halliburton's Business Dynamics

Along with the supportive macro environment for oil prices, there are other key business drivers:

• The surge in Oil and Gas Demand : The recent demand uptick, with the reported augmentation of 2 million barrels daily in comparison to last year's first half, underscores oil and gas's pivotal role in propelling the global economic engine.

• Bullish Commodity Prices : Commodity prices are looking upbeat, and Halliburton's clientele are ramping up their activity pipeline, anticipating a bustling decade ahead. Regardless of a dwindling rig count in the U.S., projections indicate a blossoming upstream expenditure well into 2023 and beyond.

• Leading Through Innovation : Halliburton's pioneering spirit shines through its advanced drilling platforms like iCruise, iStar, and LOGIX. Moreover, their foray into Completions Technology, epitomized by their SmartWell on the eCompletions Platform, is setting new production benchmarks.

• Strategic Partnerships : The company's strategic alliance, particularly the one with Vår Energi, accentuates its influential stature in the oilfield ecosystem.

• North America's Mixed Bag : While revenue experienced an 11% YoY surge, the remainder of the year might see a gentle ebb. Nevertheless, Halliburton's North American margins seem unyielding, a testament to their strategic acumen.

• E-Fleet Milestones : The traction for Halliburton's Zeus e-fleets is impressive, marked by the record signings for these electronic fleet contracts.

• Embracing the Future with Automation : A paradigm shift towards automation and remote operations is evident across all verticals. This innovation-driven shift is set to boost service delivery quality and efficiency while being cost-effective.

We saw these drivers play out in the last earnings report, demonstrating that the firm has been collecting its fair share of wins.

Halliburton's Earnings Download

Halliburton's financial snapshot for 2023's second quarter is a testament to their resilience and adeptness.

• Revenue Metrics : In Q2 the company showed a commendable 14% YoY revenue growth, mirroring Halliburton's knack for leveraging global demand effectively. Dissecting this, international markets burgeoned by 17% YoY, while North America wasn't far behind with a respectable 11% YoY uptick. It will be interesting to see how international markets shift over the coming quarters with the evolving geopolitical risks materializing with time.

• Income Dynamics : Operating income witnessed a remarkable 41% ascent when pitted against 2022's adjusted figures- a clear indication of operational prowess.

• Cash Flow : Halliburton's cash position is strong, having pulled in $1.1 billion from operations and a robust $798 million as free cash flow. The quarter also saw a strategic buyback of shares worth $250 million, echoing their unwavering commitment to enriching shareholder value.

This was a strong report, and one can argue that the stock deserves to be up more despite the strong move due to supply and demand dynamics supporting a favorable outlook.

Halliburton will report Q3 earnings on Tuesday, October 24. Investors should look for strong EPS figures (greater than $0.75/Share), but the highlight will be how the changing supply and demand dynamics from OPEC are affecting the business. I would expect a strong year-over-year performance across the board with less sensational improvements quarter over quarter.

As you might guess, analysts agree that EPS figures will continue to trend upwards, and Halliburton has managed to beat expectations in each of the past five quarters.

It is likely that we will see the expected growth materialize as the major economies are essentially fully opened, and we are unlikely to see any relief from OPEC in the medium turn. There is a risk that if a conflict should deepen between Iran and the US following the horrific attacks in Israel, Iran could aggressively ramp up production as it has in the past to raise funds. This would soften oil prices slightly, but a collapse would be unlikely without support from OPEC. It is likely that Energy will become a hot theme over the coming months due to these tensions, and firms like Halliburton could see some uncharacteristic volatility.

The Takeaway

Halliburton has undoubtedly proven its mettle amidst fluctuating commodity prices, with the stock showcasing an admirable 45% surge in just a year. This upward trend, fortified by OPEC's strategic production cuts and geopolitical intricacies, hints at the resilience and adaptability of the company. The Q2 earnings report further buttresses Halliburton's prowess in the oilfield landscape. However, investors should stay alert. As global tensions simmer, particularly concerning Iran and the U.S., the energy sector might be in for a rollercoaster ride. While Halliburton seems well-poised to benefit from a surge in oil prices, a recession could dent consumption and introduce headwinds. There is also the tendency of low-cost producers to ramp up production when prices are high. That said, the trade is a lot clearer than it was a year ago, though there is less meat left on the bone. I rate Halliburton as a hold.

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