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

Unlike the little hedge fund interest in Schlumberger, Baker Hughes Incorporated (NYSE:BHI) had 29 hedge funds long the stock going into 2013. These include Richard Pzena’s Pzena Investment Management, with 2.5% of its total 13F portfolio and Greenhaven Associates.

Yet another provider of drilling equipment and services includes Weatherford International Ltd (NYSE:WFT), which is expected to have some of the best earnings improvement over the interim. As well, its balance sheet should continue to improve. The company hopes to have its debt down to between $2.5 billion and $3 billion by 2013, versus the current $7 billion. This will be on the back of asset sales, reduced capex and working-capital reductions.

Currently, its long-term debt-to-equity ratio is the highest and its current ratio the lowest among the major oil-servicing companies listed. Its poor balance sheet and gross earnings misses over the last three quarters leave room for caution on the stock. The company, however, is looking to continue tapping the faster-growing international markets. For 2012, 55% of its operating income was generated from North America, compared with 66% in 2011.

By the numbers

Halliburton Company (NYSE:HAL)’s valuation, trading at 10 times forward earnings, compared to Schlumberger Limited. (NYSE:SLB)’s 12.5 times, should provide support for the stock. Also, the company has maintained an impressive 17.5% operating margin over the last five years (on average) and currently boasts a 12.6% return on equity.

Halliburton also has a very solid balance sheet, with relatively low debt and solid liquidity:

Don’t be fooled

Halliburton still has ligation hanging over it, but the company has been putting back reserves, recently adding $1 billion to the reserves (on top of the $300 million it put back last year). Although this increase in reserves is an interim setback, it shows the company’s focus on a finding a resolution that will put the issues related to the oil spill to rest.

Despite the lingering shadow of the deepwater incident, Halliburton Company (NYSE:HAL) is defending its North American leadership position, as well as closing the gap on Schlumberger’s stronghold in the international market. I think the cheap valuation provides support for the stock.

The article Playing the Derivative Oil Play originally appeared on Fool.com and is written by Marshall Hargrave.

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