Although crude spot prices have receded off the highs, oil remains near multi-month highs as the global economy continues to restart from the pandemic lockdowns, explains Boris Schlossberg of BK Asset Management.
Oil does not have to rise much further, just simply hold steady at these levels in order to generate significant profits for the oil-services giant Haliburton (HAL).
Big Red has recovered off its pandemic panic lows but remains well below its five-year high of $50/share. The oil industry has experienced a cataclysmic contraction as environmental concerns and competing energy sources have eaten into market share, but like it or not carbon fuels remain the most efficient means of energy for now and as the world economy continues to expand the very nature of demographic and economic growth in emerging markets such as India and Vietnam will continue to provide sustained demand, which in turn should keep Halibuton’s oil services business busy.
The company at its core benefits from any pick-up in upstream business. As the author of the Daily Drilling Report notes,”Hally is principally in the upstream oil and gas well drilling and completions business, and is the biggest pressure pumper (fracker)in North America. About 45% of their revenue comes from North America. On the way down this makes them vulnerable. It’s the opposite case now, which sets the stage for a bull run in revenues and profits, and improvements in stock prices.”
In addition to the improved macro environment HAL has made great strides in its core operating business with the help of AI and the cloud. Company president Jeff Miller noted, “In the first quarter, we introduced a new real-time data transmission system for a major customer in the North Sea. This high fidelity, low-latency data highway is an essential building block for virtual remote operations that are performed without human intervention and use real-time data and tailored algorithms. We also launched a new digital workflow on a private cloud for an integrated services contract in the Middle East.”
The improvements in technology will allow HAL to operate with much lower capex costs going forward and will prove high accretive to margins over the next 12-18 months. The stock is trading near the $20 level as the market decides whether the oil rally is real. If the crude prices hold, investor optimism regarding HAL business prospects should improve markedly and the stock should trade towards $25 and perhaps even $30 level over the medium term horizon.
To learn more about Boris Schlossberg visit BKForex.com.