Market Analysis by Nikhil Gupta: Halliburton, Energy, Crude Oil

With My Short Call
Feb 12 2016, 08:30
About: HAL

Halliburton has dropped 30% since I last advised shorting at $41.54.
The pain might not be over for the energy company as outlook for oil remains bleak.
Lower 20s would present a favourable opportunity to investors.
The last time I wrote about Halliburton Company (NYSE: HAL), I advised investors to short the stock in my analysis Halliburton: Short or Not?. At that time, the stock was trading at $41.54. As of today, the stock is currently down more than 30% at $28.80 as the oil situation gets worsened, and the deal with Baker Hughes Inc. (NYSE: BHI) still awaits completion.

Energy companies are now scaring even the most seasoned investors, with a majority of them seeking refuge in dividend-paying companies such as Exxon Mobil (NYSE: XOM) as there seems to be no easy solution to the oil glut which keeps pushing the oil price lower. My assessment is that oil will trade in the $20-$25 band before it gets better.

The oil market has reached a stage where it has become anybody’s guess to call a bottom or a rebound, but I find it hard to see oil trading above $50 per barrel in the next couple of years. And that will further drag down the stock prices of energy companies which require higher prices to cover their costs. Halliburton (NYSE:HAL) being strongly correlated to the oil price will not be spared too. Check out the monthly HAL vs. NYMEX Crude price chart below.

(click to enlarge)


Keeping aside oil’s contribution to the plummeting stock price, I believe that the market is also closely watching the deal with Baker Hughes Inc. The market is beginning to price in the prospects of a failed deal. Though April 30 has been kept as the final date for the transaction, Morgan Stanley believes that there is a possibility that the deal might not go through and has therefore downgraded Baker Hughes to equal-weight from overweight. A failed deal will not only weaken BHI’s position but also lead to more losses for the HAL investors. An entity combined of HAL and BHI would be expected to better weather the low oil price environment. Individually, the companies are facing constrained revenues and future expectations remain grim to say the least.

Halliburton recently announced a quarterly dividend of $0.18 a share, bringing the year total to $0.72 and the yield to 2.43%, in an attempt to keep the investors from dumping their holdings. As the tide turns dangerous for investors, dividend-paying stocks and safe-haven assets such as gold and US dollar are shooting upwards.

From a balance-sheet perspective, I see lower 20s as more appropriate levels for the stock. As of December 31, Halliburton had total current assets of $21.61 billion and total current liabilities of $5.36 billion, putting the working capital at $16.25 billion. Valuations closer to the working capital will provide a short-term cushion to the stock. The market cap of Halliburton as of yesterday’s close stands at $24.72 billion.


I do not think that Halliburton presents a really attractive opportunity at current levels, and therefore, buying can be postponed as the sell-off is yet to end.

Having stated my cautious view, I must admit that I can be completely wrong about the oil scenario. If oil were to rebound from current levels, the decline in Halliburton will be stopped and investors would be rewarded for sticking with the company.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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