HAL: Undervalued by at Least 33%

NEW YORK (TheStreet) -- It always amazes me how, when discussing some of the more prominent oil companies on the stock market, it requires a considerable amount of prying to get Halliburton (HAL) included in the conversation among names such as Exxon Mobil (XOM) and Schlumberger (SLB). Particularly when, compared to Schlumberger, the stock is trading at a significant discount with a price-to-earnings ratio of 8 points less. Meanwhile the company has demonstrated on a consistent basis not only that it can beat analysts' expectations, but it also understands the importance of delivering on the bottom line.

I've placed some huge bets on Halliburton recently. It was clear to me that when 2011 ended, the company was going to be among of a small group that stood to benefit from rising oil prices in 2012 and the resulting effects of an increase in drilling. Disappointingly, the bet has yet to come to fruition as oil prices have shown to have had little effect on the overall energy sector due to reported supply-chain issues.

This has brought me to a point where I must decide is it time to move on or do I exercise patience and wait to see if the worst is over?

A Better First Quarter

In its most recent quarter the company reported net income of $627 million or 68 cents per share for the quarter ending in March -- representing an increase of over 21%. Extracting out the $300 charge incurred from BP's ( BP) 2010 oil spill, earnings would have arrived at 89 cents. Analysts had expected 85 cents a share. For the quarter, revenue arrived at $6.86 billion -- not only topping the $5.28 billion that it logged a year ago, but beating analysts' estimates of $6.80 billion.

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The company also said, due to production movement away from lower-profit gas operations, the number of active oil rigs in the U.S. climbed to a 25-year high. For the quarter, there was a 12% increase in the average number of active rigs drilling for oil in the U.S., while gas rigs fell 17%. The company also reported growth of 35% to $4.3 billion of its completion and production segment -- a part of the business that provides stimulation and cementing services. The company said the growth was due to demand for pressure-pumping services in the U.S. land market.

Those were the positive sides of the report. On the less than stellar side, I did notice a decline of 3% in revenue from the previous quarter -- albeit not a huge number, but significant enough to be noticed. Also of some concern was the margin was unimpressive and showed a decline from the previous quarter. However, when considering the fact that rival Baker Hughes ( BHI) previously issued an earnings warning due to supply chain issues, Halliburton's overall performance should be considered a success.

Moving Forward

As I have said previously, there is without question tremendous value at current levels and from an earnings standpoint, it continues to steadily demonstrate an ability to beat expectations and deliver on its bottom line. When looking at the company's low price-to-earnings ratio of 10, it really becomes a challenge to not see the tremendous value that is presented -- particularly for the fact that the stock is down almost 40% since its 52-week high of last summer. For that matter, the entire sector has come under scrutiny due to what I consider overblown concerns regarding natural gas and fears related to production.

Bottom Line

Making an investment case for Halliburton really comes down to the realization that the world population will continue to grow. With that in mind, it stands to reason that demand for oil and gasoline will also rise commensurate to that growth. When one considers the fact that there is an increase in worldwide deepwater drilling and that production from North American shale does not appear to be slowing, it further affirms that the stock is being underappreciated.

Value investors should certainly make a play at current levels. Fair market value for the stock appears at least 33% higher, in the mid-$40s.

At the time of publication, the author was long HAL.

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