This Oil Stock Is a Screaming Buy

What Benjamin Graham said more than half a century ago still holds true. In the short term, the stock market behaves like a voting machine, but in the long term, it acts like a weighing machine. In short, the true value of a stock will be revealed in the long run.

The oil field services industry has collectively taken a hit since the markets tanked a couple of months back over fears of another recession. However, I'm going to show you one major player in this space whose stock has plunged a whopping 43% since July 25 this year compared to the S&P's 14% decline: Halliburton (NYSE: HAL  ) . To me, this stock looks nothing short of a mouth-watering buy.

Why Halliburton?
It's economics 101. Global demand for oil and natural gas is shooting up. Despite falling energy prices, production is hardly affected. Exploration and production companies need the help of oilfield services companies in a big way. With the advent of newer and hotter shale plays in North America, the potential for these specialized services is huge. This is where Halliburton's substantial expertise is required.

The services provided start right at the infant stage. From prospecting for new resources to providing operating implementations, Halliburton is a one-stop solution that upstream companies can't ignore. The company's software solutions to minimize risk and increase efficiency are just a small part of the deal.

Rig count in the United States along with horizontal drilling activity has increased substantially along with a shift to oil and increased drilling activity in liquids-rich shale basins. Technological advances in drilling have undoubtedly increased demand for oil field service companies, and this should only become stronger over the next few years.

Again, geopolitical disturbances in North Africa seem to be easing. With operations in Egypt recovering and drilling companies looking to restart operations in Libya, revenue prospects are fuller. Halliburton should see higher cash inflows here.  

In terms of the stock, the company looks pretty attractive. Here's how it stacks up against its peers:

Company

Forward P/E

P/B

Dividend Yield

Halliburton

7.9

2.6

1.1%

Schlumberger

(NYSE: SLB  )

12.7

2.6

1.6%

Baker Hughes International

(NYSE: BHI  )

9.2

1.4

1.2%

Weatherford International

(NYSE: WFT  )

9.6

1.0

N/A

National Oilwell Varco

(NYSE: NOV  )

11.0

1.4

0.8%

Source: Capital IQ, a Standard & Poor's company and Yahoo! Finance.

Forward price-to-earnings is where things look attractive. Again, a relatively higher price-to-book of 2.6 doesn't really bother me. Halliburton has bought back shares worth $3.4 billion in the last five years. While the dividend yield isn't too impressive, it's worth the deal.

The confidence management has in its business model, even in these times of recession, is commendable.

Here is a company that has reported a 36% growth in revenue in the last 12 months despite seeing disruptions in various locations around the world. Most notable has been the bad name it had received following the Gulf of Mexico oil spill last year. Halliburton was responsible for cementing BP's (NYSE: BP  ) Macondo well that involved Transocean's (NYSE: RIG  ) rig explosion. However, the moratorium that followed in the Gulf hardly seemed to have an effect.

International operations are where I'm betting high. Contracts awarded by Statoil and Chevron (NYSE: CVX  ) in Europe and Asia, respectively, are where things are only warming up. The emerging economies of China and India cannot be ruled out with regards to further investments. Investors should watch out.

Foolish bottom line
I'm having a hard time figuring out why investors are running away from this stock. But that's where savvy investors get greedy. If you're looking for other great stocks to profit off the energy boom, check out The Motley Fool's special report, "3 Stocks for $100 Oil." You can download it for free by clicking here.

Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Schlumberger, Transocean, and National Oilwell Varco. Motley Fool newsletter services have recommended buying shares of Chevron and National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (37)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 05, 2011, at 4:38 PM, ballengerm wrote:

    How much of Halliburton's experience/focus is related to conventional vs. unconventional oil and gas extraction?

  • Report this Comment On October 05, 2011, at 5:57 PM, moblackty wrote:

    Why would I buy a service comany vs a major oil company? They have no assets other than equipment and people. At least oil companies have

    valuable assets in the ground thats not going to

    rust away. COP,BP!, EXXONMOBILE LIST GOES ON.

  • Report this Comment On October 05, 2011, at 6:19 PM, midnightmoney wrote:

    So Isac, given that you see halliburton as a mouthwatering buy, will you be buying some yourself? A mouthwatering buy is a pretty definitive accolade. What do you say?

  • Report this Comment On October 05, 2011, at 10:15 PM, dividendgrowth wrote:

    You better buy a great company at fair price than a fair company at great price.

  • Report this Comment On October 05, 2011, at 10:18 PM, TruffelPig wrote:

    There are some smaller good ones: RES, BAS

    I think RES might get bought soon.

  • Report this Comment On October 06, 2011, at 9:03 AM, jwhaley1210 wrote:

    @ Ballengerm I work in the industry and spent 4.5 yrs with a service company BJ Services, now Baker Hughes. Halliburton is very much a big player within the realm of unconventional oil and gas "plays".

    Moblackty , you make a valid point when comparing service companies and oil companies, however the oil companies cannot develop their assests without the help of service companies. Especially in the nonconventional shale plays that are quickly becoming the most viable plays in the U.S. onshore. Every single one of the wells drilled in the Marcellus, Bakken, Haynseville, etc. Shales must be frac'd in order to make the wells profitable for the said oil companies. With that, it is my personal opinion that when building an oil and gas position, I think it is wise to invest in both oil companies and service companies. To disclose, I own COP, RDS-A, NOV.

    Isac, thanks for the article. I've been thinking of adding a service company and have been biased towards Baker Hughes because I used to work for them and they are a good company but now I will dig a little deeper into Halliburton and compare the two before making my decision. Just a small note due to Dick Cheney Halliiburton to no fault of their own, does tend to get much more negative press than their counterparts. Everybody against Oil and Gas activity always use Halliburton as a scapegoat but rarely mention any of their counterparts. But all in all Halliburton is a good company in the Oil Services sector.

  • Report this Comment On October 07, 2011, at 1:14 AM, isacsimon wrote:

    @ jwhaley1210,

    Thanks!

    Actually Halliburton ending up with bad publicity more than its counterparts should eventually turn out to be a blessing in disguise. A great company with its stock price pushed low for little or no reason.

    Fool on!

    -Isac

  • Report this Comment On October 16, 2011, at 9:47 PM, HWY216 wrote:

    Isac,

    Thanks for a great article! My DD has shown that HAL has one of the best fundamental ratings in it's sector. I'm long two options for HAL going into earnings & will exercise shortly after. Also long SLB.

  • Report this Comment On October 19, 2011, at 10:16 PM, isacsimon wrote:

    @ HWY216

    Thanks!

    Fool on!

    -Isac

Add your comment.

DocumentId: 1565045, ~/Articles/ArticleHandler.aspx, 4/24/2014 12:52:42 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

TREND TRACKER: Get Rich When the Web Goes Dark

It's time to say "goodbye" to your Internet! One bleeding-edge technology is about to put the World Wide Web to bed. And if you act right away, it could make you wildly rich. Experts are calling it the single largest business opportunity in the history of capitalism… The Economist is calling it "transformative"... but you'll probably just call it "how I made my millions." Big money is already on the move. Don't be too late to the party – find out the 1 stock to own when the Web goes dark.


Advertisement