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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


November 9th 2014 Halliburton
NYSE Symbol: HAL
Industry: Oil Service
Price as of 11/7: $53.86

Three weeks after the markets bottomed, the major averages continue to surge. Last weeks featured stock, Alibaba, is already up 16% following strong earnings. Seagate is up 6%. With the markets at all-time highs, there's not a lot of bargains out there except for the energy space. The strong dollar has wreaked havoc on the commodity space. A short term oversupply of oil has sent the price of crude down 26% from recent highs and the energy sector down 12%. Energy companies with high costs and a heavy debt load have been hit the hardest as they will struggle the most if oil remains weak for an extended period of time. For other oil related stocks the recent pull back is a good buying opportunity. Of the major oils, Chevron looks attractive trading for 12 times reduced earnings, yielding 3.6%. For investors looking for a little more growth potential, particularly in the fracking space, this weeks featured stock, Halliburton is a good long term bet. Halliburton provides a range of services and products for the exploration, development, and production of oil and natural gas to oil and gas companies worldwide. Halliburton is second only to Schlumberger in sheer size in their industry, but the world's biggest supplier of fracking services. In the short term the price of oil and oil related companies may remain under pressure, but long term Halliburton provides attractive valuation trading near a one and a half year low with plenty of upside when the fundamentals for oil get back on track.

Halliburton was one of the few oil related companies to report better than expected third quarter earnings. The company beat estimates by 9 cents as revenues rose 16.4% year over year to $8.7 billion. The quarterly numbers were actually quite strong as the drop in crude didn't occur until this quarter. One highlight, the completion and production (C&P) division saw revenue in the third quarter of 2014 rise to $5.4 billion, an increase of $478 million, or 10%, from the second quarter of 2014. This increase was primarily driven by higher activity in North America and strong growth across the majority of our product lines in the Europe/Africa/CIS and Latin America regions. In North America, activity levels continue to surge higher, month over month, due to an unprecedented level of service intensity. This quarter, things are clearly accelerating with no slowdown in momentum any time soon. Across key US basins, the Halliburton has negotiated higher prices that, at a minimum, should recover current and expected future cost inflation. Halliburton will begin to see the full impact of new contract pricing as it moves into 2015. In international markets, despite the geopolitical issues the co faced in areas like Russia, Libya, and Iraq, its eastern hemisphere activity continues to expand at a steady rate. On the strength of markets like Saudi Arabia, southern Iraq, West Africa in the Caspian, the co is on track to deliver double digit revenue growth for the full year 2014. In addition, HAL expects to be awarded a billion dollars of new work in Iraq. Looking forward, Halliburton believes fourth quarter revenue and margins will be flat to modestly higher than the third quarter.

Even with the strong quarterly results, the earnings estimates for Halliburton and the rest of the oil companies are coming down for future quarter. Halliburton conceded it may be a challenge for any service company to produce double digit growth next year, but Halliburton expects to continue to outpace its peers in revenue growth whatever market is handed it. Currently, Halliburton is trading for 11 times 2015 reduced earnings estimates. The company just hiked their dividend 20%, although the yield remains low at just 1.3%. With a low payout of just 15% of cash flow, Halliburton has plenty of upside to continue their trend of dividend hikes. The CEO for Halliburton believe the downward pressure on prices is mostly due to an oversupply, and will quickly prove self-correcting, especially when it comes to U.S. shale production. Unlike with conventional oil, shale wells peter out quickly and companies depend on constant new drilling to maintain production levels. This also makes shale more responsive to price movements. Lower prices will discourage new drilling, quickly removing the glut in crude supplies. If the CEO is correct, Halliburton's stock in the low $50s has plenty of upside in the coming years.