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Why Is the Market Ignoring Halliburton in 2012?

The first half of 2012 is in the rearview mirror, and investors are gearing up for what looks to be an action-packed ending. There are bound to be some big winners -- and more than a few duds -- no matter what happens in the United States and abroad.

Will your favorite stock have its victory lap as we hit the home stretch, or will it get passed by? First-half performances can hold some clues, so let's look to the recent past to find out whether Halliburton (NYSE: HAL  ) deserves a place in your portfolio going forward.

First-half recap
Halliburton started the year on a positive note with solid fourth-quarter results and got more good news when BP's (NYSE: BP  ) contentious court battle had a major ruling, absolving the oil services company of greater liability. That high note didn't last long:

HAL Total Return Price Chart

HAL Total Return Price data by YCharts

Here are a few financial snapshots of its recent performance:



Market Cap $26.1 billion
TTM Revenue $26.42 billion
TTM Net Income/Loss $2.96 billion
TTM Free Cash Flow $822 million
MRQ Revenue $6.87 billion
MRQ Net Income/Loss $627 million
MRQ Free Cash Flow ($48 million)
MRQ Revenue / Net Income Year-Over-Year Change 30% / 22.7%
P/E and Forward P/E 8.4 / 7.3
Price to Free Cash Flow 31.8
Motley Fool CAPS Rating (out of 5) ****

Source: Morningstar. TTM = trailing 12 months. MRQ = most recent quarter.

What the numbers don't tell you
Halliburton, along with drilling-services peers Schlumberger (NYSE: SLB  ) and Baker Hughes (NYSE: BHI  ) , turned in a trifecta of solid first-quarter results this spring. That didn't stop the three companies from descending toward low points in the second quarter. Since the stock-price declines weren't tied to falling profit, it's meant that this trio of companies is trading at its lowest set of valuations in years:

HAL P/E Ratio Chart

HAL P/E Ratio data by YCharts

Despite all the positive news early this year, Halliburton shareholders have also had some cause for concern. Fool analyst Jason Moser thinks the stock's attractively valued but attributes its share-price slide to market pessimism over a strategic shift.

Crude oil drilling has been on the upswing, but the long nat-gas glut appears to be drawing to a close, as my fellow Fool Travis Hoium pointed out last month. Halliburton's hydraulic fracturing expertise could wind up a liability if nat-gas producers continue to reduce their operations. Chesapeake Energy (NYSE: CHK  ) , which has had plenty of problems of its own, has been key to that strategic shift. The second-biggest nat-gas extractor cut its production early this year.

Halliburton's diversified enough to weather the nat-gas pullback, with IT services and other oilfield support. Since the company's one of the leading developers of nat-gas extraction technology, any inevitable uptick in nat-gas exploration will be a boon to Halliburton's still-growing bottom line. One thing to be wary of, however, is Halliburton's history of market underperformance. Since 1980, Halliburton's shares have returned far less than simply investing in a dividend-paying index fund. Will that trend be turned on its head in the second half of 2012? We'll have to wait and see.

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Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter, @TMFBiggles, for more news and insights. The Motley Fool owns shares of Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of Halliburton. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (0)

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 July 14, 2012, at 5:29 PM, DAG_Investments wrote:

    Thanks for the good article. Considering both the significant headwinds and the company's long history of underperforming, any idea why analysts have an average price target of $43 -- about 45% upside? I can't figure that out for the life of me.

  • Report this Comment On July 15, 2012, at 1:36 PM, DAG_Investments wrote:

    Thanks for the good article. Considering both the significant headwinds and the company's long history of underperforming, any idea why analysts have an average price target of $43 -- about 45% upside? I can't figure that out for the life of me.

  • Report this Comment On July 15, 2012, at 1:58 PM, DAG_Investments wrote:

    The link below explains better what I was getting at. Many HAL targets were either set or updated in recent months in the $45-48 range. In fact Dahlman Rose updated their buy rating on 6/7 with a price target of $57!! That seems very overly optimistic but the drastic difference between so many targets and the current price implies something is being seriously overlooked... either by ALL of the analysts or by the market. What could it be that would make that much of a price difference?

  • Report this Comment On July 15, 2012, at 5:27 PM, XMFBiggles wrote:

    @ djohn1969

    Analysts each have their own methodology for setting price targets. There are probably a number of reasons behind their analyses. I can assume expected higher oil / nat gas prices and increased E & P activity in the future, as well as reversion to a historical P/E mean all played a part.

    Analysts tend toward the optimistic side in many cases, so I take their price targets with a block of salt.

    - Alex

  • Report this Comment On July 16, 2012, at 11:05 AM, DAG_Investments wrote:

    Thank you Alex. After discussing with a number of different people (including an analyst), it seems the unusually large disparity is largely a result of disagreement between investors/markets and analysts about how and when Mocando litigation will play out. It seems investors/markets are taking the extreme pessimism view that HAL will be heavily fined and are pricing that into the stock right now. Most analysts apparently have the extremely optimistic belief that not only will HAL be relieved of any responsibility for the Mocando accident, but they seem to believe that will happen within the year (thus the high 1-year price targets).

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