Tuesday, September 16, 2014

Why Halliburton's Settlement Is Great News for Shareholders

This article was originally published by TheStreet on September 03, 2014.
By Safaraz A. Khan
NEW YORK (TheStreet) -- Halliburton's  (HAL_)  announcement Tuesday that it has reached a $1.1 billion agreement to settle most claims related to its role in the 2010 Deepwater Horizon oil rig explosion could prove to be a buying opportunity for long-term investors.

That would be welcome news, as the company's shares have fallen by nearly 5% since the beginning of July on the back of the slump in oil prices. So far this year, Halliburton's shares have risen by about 33%, closing at $67.49 on Tuesday.

The settlement was a positive development, as it removes the uncertainty related to spill claims and allows the company to focus on its domestic and international businesses.

The company has a trailing price-earnings ratio of 20.2. In these terms, Halliburton's closest competitors, Schlumberger (SLB_) and Baker Hughes  (BHI_) , are slightly more expensive with trailing price-earnings ratios of 21.1 and 23.8, respectively.
The explosion in the Gulf of Mexico on the rig, which was owned by Transocean Ltd. (RIG_) and the subsequent leakage of millions of barrels of oil from the Macondo well, operated by BP (BP_), turned into one of the worst environmental disasters ever. Halliburton carried out the cement work on the Macondo well, which, as per spill victims and BP, was faulty.
Halliburton has set aside $1.3 billion to deal with expenses related to the law suits. Susie McMichael, Halliburton’s representative, did not provide any comments on the settlement.
Meanwhile, this week, the European Brent crude prices for October delivery touched 16-month lows, while U.S. crude slipped to its lowest levels since mid-January.
That said, the exploration and production activity in North America is still going strong. In the second quarter, Halliburton's North American revenue increased 11% on the back of a 4% increase in U.S. land rig count from the first quarter, partly due to strong levels of horizontal drilling at Permian Basin in West Texas.
Unlike Schlumberger, Halliburton is focused on the North American market. 

As per Halliburton's latest quarterly results, the company generated about 54% of its revenue and 73% of its operating income, excluding the impact of corporate expenses, from North America. As a result, Halliburton's performance and its future depend heavily on the strength of the North American market.
Halliburton expects further improvements in North American activity levels, which should continue to fuel its growth. To capitalize on this business environment, Halliburton has been building on its fleet of equipment used to extract shale oil and gas.
Meanwhile, the company is also ramping up its logistics capabilities, such as its rail cars. 

Rail bottlenecks could worsen in the future, but companies such as Halliburton, whose rail car fleet could touch 7,000 cars by early next year, "are likely to fare better than those without," Robert Mackenzie, director of research at Iberia Capital, wrote in an email.

Oilfield services companies use rail cars to transport goods, primarily fracking sand, which is used in extraction of shale oil and gas.
Halliburton is also eyeing growth in international markets, particularly in Latin American and the Eastern Hemisphere. The company could witness a turnaround in Mexico, where rig count hit 10-year lows in the previous quarter, on the back of the oil reforms. 

Meanwhile, Halliburton is targeting about $3 billion worth of long-term asset management projects in Ecuador.
As for the Eastern Hemisphere, Halliburton is looking at a bright future with "slow and steady growth", despite problems in Iraq and Russia. 

Mackenzie thinks that Halliburton gets just about 2% of its revenue from Russia and 1.5% from Iraq, making it least exposed to these countries as compared with its peers. 

On the other hand, the company's growth is being driven by several markets, particularly Saudi Arabia, which has become its second-largest international market.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.