Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn’t sustainable. In others, the dividend is so low, it’s not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we’re going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn’t to say that these stocks don’t share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week’s selection.
This week, we’ll hop on over to the oil and natural gas drilling equipment and service sector and examine why Halliburton Company (NYSE:HAL) makes for an attractive future income play.
An ongoing case of finger-pointing
The demand for oil and natural gas is only rising, yet the methods by which companies are extracting oil and gas are under as much scrutiny as ever. Much of this, especially in the U.S., can be tied back to the BP plc (ADR) (NYSE:BP) Macondo well oil spill in 2010. The first phase of an ongoing trial to determine fault and who is truly responsible for spilling some 200 million barrels of crude into the Gulf of Mexico wrapped up this week. Halliburton Company (NYSE:HAL) is one of the companies implicated in the trial, since both it and Transocean LTD (NYSE:RIG) were contracted out to provide servicing and equipment on the well. Transocean LTD (NYSE:RIG) provided the workers and rig itself, while Halliburton provided the cement seal around the well. The outcome of this case could certainly put an unwelcome dent in the balance sheets of any of these three companies if they’re found guilty of any wrongdoing.
Another avoidance aspect of the Halliburton Company (NYSE:HAL) and the sector relates back to the unknown about fracking — the act of using high water pressure to break rock shale so a driller can get to oil or gas trapped deep underground. Environmental concerns regarding the potential for fracking to contaminate local and large water supplies continue to weigh on its use to retrieve underground oil and gas.
Halliburton’s huge opportunity
Yet for all these concerns, Halliburton remains one of the most widely contracted and in-demand oil equipment and service companies in existence. Its fourth-quarter report, released in January, delivered its highest quarterly revenue ever at $7.3 billion. More importantly, in spite of just a 3% sequential revenue increase and weakness in North American sales, Halliburton was able to rely on incredibly robust overseas growth to drive revenue higher. Its Latin American revenue rose 14% from the third quarter in spite of a 2% drop in rig count, as it benefited from higher software sales in Mexico and Colombia. Middle East/Asia also contributed 14% sequential revenue growth, as software and equipment sales in Saudi Arabia and Australia remained consistently strong.
Another factor that makes Halliburton Company (NYSE:HAL) a particularly intriguing play, especially in the Gulf of Mexico, is the major worldwide boom in oil and gas reserves, and an increasing demand for drilling rigs.
According to the most recent IHS Petrodata weekly rig count, fleet utilization rates in the Gulf of Mexico are up 600 basis points to 70.6% from the year-ago period. In fact, aside from South America, where utilization rates are constant from the year-ago period, all regions are showing higher fleet utilization rates. This bodes well for Halliburton when it comes time to secure additional contracts and beef up its backlog.
Domestically, and adding to the point, the Gulf of Mexico is an opportunity for rapid growth in ultra-deepwater drilling. As my Foolish colleague Travis Hoium pointed out in January, Seadrill Ltd (NYSE:SDRL), a competitor to Halliburton, has about half its fleet contracted into 2017, demonstrating oil and gas companies’ commitment to the region and belief that returns and finds will be sustainable. With the U.S. pushing for increased energy independence, Halliburton’s name should be called often when it comes to Gulf of Mexico servicing and equipment contracts.