Plenty to Love With Halliburton

NEW YORK (TheStreet) -- With almost 40% stock gains in the trailing twelve months, Halliburton (HAL) plays second fiddle to no one in the energy services space. Unless Schlumberger (SLB) happens to be in the same room. Even then, the debate would be extremely close.

To that end, I believe high expectations for Halliburton continue to be what keeps the company "trailing" Schlumberger. It's always been perception. Halliburton's investors have enjoyed 38% stock gains in 2013 versus 22% for Schlumberger. They've been "disrespected" all the way to the bank. If recent moves by Halliburton's management serve as indictators, expect this race to get even closer.

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First and foremost, given the better-than-expected results we've seen from all of the oil majors in the October quarter, there are clear signs that business conditions in North America have drastically improved, a plus for Halliburton since that is where the company takes in 50% of its revenue.

The entire industry has already bottomed and the worst is over. In that regard, while management does deserve credit for having navigated the weak oil prices environment and soft rig counts, it no longer makes sense to appraise the company's performance on a quarter-by-quarter basis, not when upstream spending in the U.S. has just begun to pick up.

What I mean is that although the industry's turnaround is encouraging, investors would be doing themselves a disservice to not expect some volatility. And I would caution about having unrealistic near-term expectations about what Halliburton is able to do. The good news here is that Bakken, a low-permeability formation that contains the largest oil accumulation in the contiguous U.S., should help Halliburton's 2014 performance.


I believe Halliburton should benefit immensely from Bakken's production potential. There are also advantages from increased drilling, which should lead to demand in Halliburton's equipment and services. All told, Halliburton is now in one of the best positions it has ever been to outperform. The question is how much more pressure is on management to execute given that there are now fewer reasons to blame for underperformance.

These and other questions will be answered on Tuesday when Halliburton reports fourth-quarter earnings results. Given that Baker Hughes (BHI) recently cut earnings and revenue estimates, Halliburton investors will be biting their nails to hear what management has to say about not only in this quarter, but for all of 2014. The Street will also get a sense of whether Halliburton's strong 2013 stock gains can be sustained.

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Analysts will be looking for earnings-per-share of 98 cents on revenue of $20.69 billion, which would represent a year-over-year revenue decline of 5.7%. As I've said, however, this quarter (and even the next quarter) should not make or break this company on the heels of what has been the industry's worst two-year period in quite some time.

Another question to be answered in this quarter is to what extent management can convince the Street that Halliburton can maintain its market lead in the fracking/pressure pumping market. That is, of course, if you believe this is still a worthwhile business. As I've said, while prices have shown to be on the upswing, they have yet to stabilize. And management must make a decision related to costs and the extent to which its fleet will work/overwork.

These sorts of decisions will depend on the level of demand Halliburton sees in the coming quarters. Here, too, this is one of the reasons I've believe management has not receive the credit they deserve, especially from the standpoint of efficiency improvements. These fundamental tradeoffs have not only paid dividends, they've also deleveraged Halliburton to the extent that it is able to expand activities offshore and overseas.

All things considered, it's hard to not like this company. I would recommend Halliburton for investors looking to play the energy recovery not only in the U.S. but internationally. With shares trading around $50, there's plenty of upside potential towards the low $60s given management's recently announced $3.3 billion stock buyback program.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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