Halliburton Company (HAL), Schlumberger Limited. (SLB), And Playing the Derivative Oil Play

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Halliburton CompanyIt appears there’s always value to be found in the rubble. Halliburton Company (NYSE:HAL) posted first-quarter earnings (excluding oil-spill charges) of $0.67, beating consensus estimates by $0.10, and has been positioning itself nicely following the Deepwater Horizon incident in 2010. Last quarter’s results showed an $18 million loss for the first quarter, which includes the $637 million reserve for the oil spill.

The earnings beat was due in part to an increase in the international business, which countered weakness in the North American market. Halliburton Company (NYSE:HAL) still remains one of the largest oilfield service providers in the world, offering a variety of equipment, maintenance and engineering and construction services to the energy and industrial sectors. Its two key segments include the completion and production segment, which accounts for 65% of revenue, and drilling, which accounts for 35% of revenue.

Tailwinds

Halliburton Company (NYSE:HAL) remains one of the top-three players in each of its product categories and operates in all the major hydrocarbon-producing regions of the world, being the world’s second-largest oilfield services firm after Schlumberger Limited. (NYSE:SLB). Another key tailwind for the industry will be the rise of new deepwater rigs through 2014, according to S&P, which should spur demand for drilling-related services. What’s more is that deepwater drill work is a higher-margin business.

Although certain North American markets may remain weak over the interim, international operations should help carry the company, with Latin America offering solid shale development opportunities. The other positive is its strong financial profile, with $2.5 billion in cash.

Halliburton Company (NYSE:HAL) has one of the best positions in the U.S. pressure-pumping market thanks to vast amounts of acreage in some high profile shale plays, such as the Haynesville, Eagle Ford shale and Bakken.

Halliburton Company (NYSE:HAL) has a number of top name hedge funds backing it, including BP Capital (Boone Pickens) and Omega Advisors; but most notable is Jeff Ubben’s ValueACT, which has about 5.7% of its portfolio invested in the oil industry service company.

The competition

Other major operator includes Schlumberger Limited. (NYSE:SLB), which has been facing headwinds of its own, but exposure to growing deepwater activities, thanks to its seismic capabilities, is an overall positive for the company.

The drilling company did manage to post 1Q 2013 EPS of $1.01, compared to $0.96 for the same quarter last year and beat consensus of $0.99. However, over the last five years, it has only managed to grow EPS at an annualized rate of 0.5%.

North America will continue to be a drag for Schlumberger Limited. (NYSE:SLB), with the rise in natural-gas prices not leading to the expected increase in dry gas-drilling activity; meaning a number of gas producers have scaled back operations and cut budgets in the sector, an overall negative for Schlumberger Limited. (NYSE:SLB).

Schlumberger Limited. (NYSE:SLB) also has a number of big name hedge funds invested in it, but the concentration isn’t quite as robust as Halliburton Company (NYSE:HAL). Where there were 10 hedge funds with at least 3% of their portfolio invested in Halliburton there are only four hedge funds with 3% for Schlumberger Limited. (NYSE:SLB). This does, however, include Merchants’ Gate Capital, which has 11.5% of its portfolio invested in Schlumberger.

Baker Hughes Incorporated (NYSE:BHI), another notable drilling servicer, has boosted activities in the Gulf of Mexico, as well as, like the other oil industry service companies, focusing on the international and offshore markets for near-term growth. Baker’s fourth quarter adjusted earnings fell 48% from the year-ago level; this was due to decreased rig-activity levels.

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