Halliburton's Ready to Rally

For Halliburton (HAL Quote), a little boost of energy could go a long way.

While sagging oil and natural gas prices and a slowing global economy have provided reasons for investors to consider shorting the energy sector -- especially names like Halliburton -- it's much too late for that now.

In fact, investors can get ahead of the curve by putting Halliburton on their radar screen. When energy stocks rally, large caps like Halliburton will lead the pack. And, call it what you may -- a relief rally, a commodity price rally or a value rally -- there are several indications a bottom is near and a recovery should follow.

By just about any metric, Halliburton looks inexpensive. After losing nearly 40% of its value since May 20, the stock -- priced around $32 now -- is trading at under 17-times 2002 earnings estimates, nearly a 10% discount to its peer group.

And both the earnings estimates and multiples may be unjustly depressed. UBS Warburg energy analyst Jamie Stone suggests energy-services stocks are discounting $19.15 a barrel crude oil while natural gas prices are discounting $1.85 per million British Thermal Unit (MMBtu), a view he calls "too pessimistic." Crude is currently trading around $26 per barrel and gas is hovering around $3 per MMBtu.

And, now, with news that OPEC may again cut production, slowing demand for crude may be met with slowing supply, providing support for prices. More importantly, OPEC's stinginess should shine a spotlight on Halliburton's strongest business segment, international oil services. Any increase in non-OPEC drilling in areas such as the North Sea provides a boost to Halliburton.

Halliburton's engineering and construction unit should continue to increase its contribution to the bottom line. Not only will Halliburton continue to be a major player in energy, chemical and transportation infrastructure around the world, it will also see profit opportunities from power plant development both domestically and internationally. While it may not hit a home run in the E&C business, the singles and doubles should be enough to boost revenue and earnings in the coming year.

In addition to the dire predictions about energy prices, Halliburton detractors like to focus on the company's potential asbestos liability. And, while the company has reserved funds to cover potential liability, most analysts who follow the stock consider it more of a red herring than a threat to Halliburton's viability.

Halliburton reports earnings late Wednesday with the street expecting 30 cents a share, a number that appears in easy reach. And, while Halliburton may provide caution about the second half of the year -- something that has become the hallmark of this quarter's energy earnings calls -- the stock appears to be expecting the worst already.

With OPEC's steadfastness, the first signs of tighter supplies and higher prices may be just around the corner. Energy stocks will follow and investors will flock to the names they know first, Halliburton among them. The fact the company's fundamentals and outlook look solid shouldn't hurt the rally.