Argus Upgrades Halliburton

12/22/2016 7:00 am EST


We expect oil services stocks to be early beneficiaries of any recovery in energy prices and believe that the recent production cut by OPEC, will support higher crude oil prices, suggests analyst Bill Selesky of Argus Research.

Founded in 1919, Halliburton (HAL) is one of the world’s largest providers of products and services to the energy industry, with over 50,000 employees and operations in more than 70 countries.

We believe that the company’s prospects remain strong despite recent declines in E&P spending and the failure of the Baker Hughes acquisition.

We believe that the recent production cut by OPEC, will support crude oil prices in the $50-$52 range.

This will benefit both sales and profits in the near-term, and given its relatively greater exposure to the U.S. onshore market, enable Halliburton to see a faster rebound in profit improvement than most peers.

Halliburton does not provide formal financial guidance. However, on the 3Q conference call, management said that it expected gradually higher commodity prices to raise rig count amounts.

At the same time, it remains cautious about customer activity in 4Q due to holiday- and weather-related downtime.

We are narrowing our 2016 loss estimate to $0.05 from $0.08 per share to reflect our modestly higher crude oil price assumption for the remainder of the year.

This estimate also assumes continued market share improvement and margin expansion in North America. The consensus estimate calls for a loss of $0.06 per share.

We are also raising our 2017 EPS estimate to $1.03 from $0.98 based on our expectations for increased rig activity, higher crude oil prices, and stronger revenue growth next year. The 2017 consensus EPS estimate is $1.03.

Halliburton shares have outperformed thus far in 2016, rising 61.3%, while the S&P 500 Energy index has risen 27.1%.

In addition, since the termination of the Baker Hughes (BHI) merger on May 1, HAL shares have risen 32.2%, while the S&P 500 Energy index gained 14.4%.

Finally, Halliburton should also benefit from an additional $1 billion in cost cuts by the end of 2016 and likely beyond, based on its economies of scale and industry-leading technology.

Given its relatively greater exposure to the U.S. onshore market, we also expect Halliburton to see faster revenue improvement than most peers. We are reaffirming our BUY rating with a revised price target of $64.

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