Earnings Analysis: Halliburton Co. (NYSE:HAL)

Halliburton Company (NYSE:HAL) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visitwww.capitalcube.com.

Halliburton Co.’s analysis versus peers uses the following peer-set: Schlumberger Limited. (NYSE:SLB), National-Oilwell Varco, Inc. (NYSE:NOV), Baker Hughes Incorporated (NYSE:BHI), Cameron International Corporation (NYSE:CAM), Technip (PINK:TKPPY), Weatherford International Ltd (NYSE:WFT), Oceaneering International (NYSE:OII), Dresser-Rand Group Inc. (NYSE:DRC), Superior Energy Services, Inc. (NYSE:SPN) and Seacor Holdings, Inc. (NYSE:CKH). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2012-09-30 2012-06-30 2012-03-31 2011-12-31 2011-09-30
Revenues 7,111.0 7,234.0 6,868.0 7,064.0 6,548.0
Revenue Growth % (1.7) 5.3 (2.8) 7.9 10.3
Net Income 608.0 745.0 635.0 906.0 848.0
Net Income Growth % (18.4) 17.3 (29.9) 6.8 14.7
Net Margin % 8.6 10.3 9.2 12.8 13.0
ROE % (Annualized) 16.4 21.0 18.8 28.4 28.3
ROA % (Annualized) 9.4 11.9 10.5 16.1 16.5

Valuation Drivers

Halliburton Co. trades at a lower Price/Book multiple (2.1) than its peer median (6.4). We classify HAL-US as Harvesting because of the market’s low expectations of growth (PE of 11.1 compared to peer median of 19.2) despite its relatively high returns (ROE of 21.0% compared to the peer median ROE of 13.0%).

The company’s median net profit margins of 10.2% and relative asset efficiency (asset turns of 1.2x compared to peer median of 0.8x) give it some operating leverage. HAL-US’s net margin is less than (but within one standard deviation of) its five-year average net margin of 11.4%.

Economic Moat

The company enjoys both better than peer median annual revenue growth of 38.1% and better than peer median earnings growth performance 67.4%. HAL-US currently converts every 1% of change in annual revenue into 1.8% of change in annual reported earnings. We view this company as a leader among its peers.

HAL-US’s return on assets is above its peer median both in the current period (12.2% vs. peer median 6.0%) and also over the past five years (12.6% vs. peer median 8.5%). This performance suggests that the company’s relatively high operating returns are sustainable.

The company’s gross margin of 25.3% is around peer median suggesting that HAL-US’s operations do not benefit from any differentiating pricing advantage. However, HAL-US’s pre-tax margin is more than the peer median (15.1% compared to 11.1%) suggesting relatively tight control on operating costs.

Growth & Investment Strategy

While HAL-US’s revenues growth has been above the peer median (10.7% vs. 6.0% respectively for the past three years), the stock’s PE ratio of 11.1 is less than the peer median. This implies that the company’s earnings are peaking and the market expects a decline in its growth expectations.

HAL-US’s annualized rate of change in capital of 20.3% over the past three years is around the same as its peer median of 18.5%. This investment has generated a better than peer median return on capital of 13.8% averaged over the same three years. The greater than peer median rate of return suggest that the company may be under investing in growth.

Earnings Quality

HAL-US’s net income margin for the last twelve months is around the peer median (10.2% vs. peer median of 8.7%). This average margin and relatively conservative accrual policy (1.2% vs. peer median of 0.8%) suggests possible understatement of its reported net income.

HAL-US’s accruals over the last twelve months are around zero. However, this modestly positive level is also greater than the peer median which suggests some amount of building of reserves.

Trend Charts

Graph of Revenues Trend for Halliburton Co. (NYSE:HAL)
Graph of Revenues Trend for Halliburton Co. (NYSE:HAL)
Graph of Net Margin Trend for Halliburton Co. (NYSE:HAL)
Graph of Net Margin Trend for Halliburton Co. (NYSE:HAL)
Graph of Accruals Trend (% revenues, Quarterly) for Halliburton Co. (NYSE:HAL)
Graph of Accruals Trend (% revenues, Annual or TTM) for Halliburton Co. (NYSE:HAL)

Company Profile

Halliburton Co. provides oil and gas exploration and its related services. The company adds value through the entire lifecycle of oil and gas reservoirs and integrates products and services, starting with exploration and development, moving through production, operations, maintenance, and conversion and refining, to infrastructure and abandonment. It is a leading provider of services and products to the energy industry related to the exploration, development, and production of oil and natural gas. The company operates its business through two segments: Completion & Production, and Drilling & Evaluation. The Completion & Production segment delivers cementing, stimulation, intervention, pressure control and completion services. This segment consists of Production enhancement services, completion tools and services, cementing services and Boots & Coots. Its Production Enhancement services include stimulation services and sand control services. Its completion tools and services include subsurface safety valves and flow control equipment, surface safety systems, packers and specialty completion equipment, intelligent completion systems, expandable liner hanger systems, sand control systems, well servicing tools, and reservoir performance services. The reservoir performance services include testing tools, real-time reservoir analysis, and data acquisition services. The cementing services involve bonding the well and well casing while isolating fluid zones and maximizing wellbore stability. The Boots & Coots include well intervention services, pressure control, equipment rental tools and services, and pipeline and process services. The Drilling & Evaluation segment provides field and reservoir modeling, drilling, evaluation, and precise wellbore placement solutions that enable customers to model, measure and optimize their well construction activities. This segment consists of fluid services, drilling services, drill bits, wire-line and perforating services, testing and subsea, software and asset solutions and integrated project management and consulting services. The fluid services provide drilling fluid systems, performance additives, completion fluids, solids control, specialized testing equipment, and waste management services for oil and natural gas drilling, completion, and work-over operations. The drilling services provide drilling systems and services, including directional and horizontal drilling, measurement-while-drilling, logging-while-drilling, surface data logging, multilateral systems, underbalanced applications, and rig site information systems. The drill bits provides roller cone rock bits, fixed cutter bits, hole enlargement and related down-hole tools and services used in drilling oil and natural gas wells. The wire-line and perforating services include open-hole wire-line services that provide information on formation evaluation, including resistivity, porosity, density, rock mechanics, and fluid sampling. The perforating services include tubing-conveyed perforating services and products. The testing and subsea services provide acquisition and analysis of dynamic reservoir information and reservoir optimization solutions to the oil and natural gas industry utilizing down-hole test tools, data acquisition services using telemetry and electronic memory recording, fluid sampling, surface well testing, subsea safety systems, and reservoir engineering services. The software and asset solutions supplies integrated exploration, drilling, and production software information systems, as well as consulting and data management services for the upstream oil and natural gas industry. The Drilling & Evaluation segment also provides oilfield project management and integrated solutions to independent, integrated, and national oil companies. Its segments offer products and services to upstream oil and gas customers worldwide, ranging from the manufacturing of drill bits and other down-hole and completion tools to pressure pumping services. The company was founded by Erle P. Halliburton in 1919 and is headquartered in Houston, TX.


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This article was originally written by abha.dawesar, and posted on CapitalCube.