Those Who Run With the Bulls on Halliburton Will Likely Get Gored
Never confuse a bull market with brains.
When stocks continually hit record highs, as has been the case over the past week, every investor feels like a moneymaking savant.
But as Berkshire Hathaway's Warren Buffett once famously wrote: "After all, you only find out who is swimming naked when the tide goes out."
One poorly clad swimmer right now is oilfield services giant Halliburton (HAL) - Get Report , which is scheduled to report second-quarter earnings next Wednesday.
Although many analysts are bullish on Halliburton, investors should be wary. Halliburton is enjoying an irrational exuberance that is likely to burn investors.
The average analyst expectation is that Halliburton will post quarterly adjusted earnings per share of 18 cents, compared with 44 cents a year earlier. For the third quarter, the expectation is a loss of 9 cents, compared with adjusted EPS of 31 cents a year earlier.
Analysts expect Halliburton to post a loss of 23 cents a share, compared with earnings of $1.56 in 2015.
A positive earnings surprise next week doesn't seem to be in the cards. Major exploration and production companies such as BP, Chevron,ConocoPhillips and ExxonMobil continue to downsize their operations, which translates into a dearth of drilling contracts for oilfield services companies such as Halliburton and its beleaguered rivals Seadrill and Transocean.
Although energy prices have rebounded this year, they still hover below $50 a barrel and exhibit fierce volatility.
Rising oil prices have propelled the stock market in recent months, but the price plunged on Wednesday after the Department of Energy reported that crude oil stockpiles declined less than expected last week.
West Texas Intermediate, the U.S. benchmark, fell $2.05, or 4.4%, to close at $44.75. Eight of the 10 biggest losers in the S&P 500 Wednesday were energy companies.
To be sure, economic growth remains on track in the U.S., but it isn't robust enough in Asia and Europe to make a significant dent in the huge oil glut that is sloshing around the globe.
Despite the renewed optimism of analysts and traders over the energy sector as a whole and drilling companies in particular, full recovery in the energy patch remains a long way off. In an overvalued broader market prone to correction, stocks such as Halliburton have gotten ahead of themselves and remain vulnerable.
Several analysts have upgraded Halliburton, and the stock has risen 33% year to date. However, another shock on the magnitude of the Brexit would weigh the heaviest on overbought stocks such as Halliburton.
In the meantime, deeply indebted Halliburton, Seadrill and Transocean can't slough off underperforming assets and restructure debt fast enough to make up for the continuing shortfalls in revenue.
The company's total debt stands at $15.2 billion, for a debt-equity ratio in the most recent quarter of 1.18. The debt-equity ratio in the oil and gas drilling sector is an average 0.58.
Halliburton's ugly balance sheet won't get prettier anytime soon.
The verdict: Stay away from Halliburton and the oilfield drilling services sector for now.
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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.