Halliburton's Improved, but Plenty of Work Left to Do

For a company whose main source of revenue is based on its ability to drill, there were doubts over whether Halliburton  (NYSE: HAL  )  could ever find a bottom. However, the topic was not oil; it was the stock, which had been in a freefall until finding a floor at $26 per share.

However, things suddenly changed over the past two months as shares soared 30%. Even though the stock was still trading at a P/E 5 points below rival Schlumberger  (NYSE: SLB  ) , I had my doubts over whether this level of optimism was deserved. But with the release of its Q4 results, Halliburton answered.

Revenue was light but outpaced rivals
The nature of the energy sector causes quite a bit of confusion, especially when it comes to comparing strengths and weaknesses. Plus, these names are not always competing for the same markets, nor do they ever apply the same level of effort and resources toward securing revenue. So keeping things in the proper context makes thing clear.

As noted, Halliburton's stock suffered a brutal punishment last year. But relative to expectations, the company, in fact, did pretty well, especially when compared with the performance from Baker Hughes  (NYSE: BHI  ) . Nonetheless, the Street demanded improvements. Analysts were looking for earnings of $0.61 per share on revenue of $7.06 billion. This meant that analysts were anticipating flat sales with almost a 40% decline in earnings per share.

These estimates remained unchanged, even though Schlumberger posted a 5% sequential revenue growth the week prior in its Q4 results. Nonetheless, despite the pessimism, Halliburton delivered earnings of $0.67 per share on revenue of $7.3 billion -- enough to beat on both top- and bottom-line projections. Plus, this was the company's highest quarterly revenue performance in its history.

The record results notwithstanding, growth of only 2.5% year over year was nothing to write home about. And despite the beat, Halliburton still has a way to go to supplant Schlumberger's 8% growth. But then again, Schlumberger has consistently outperformed this sector over the past five years, while doubling revenue from $6 million to more than $13 million. Essentially, its Q4 performance was expected.

However, it's encouraging for investors that Halliburton is doing better than just holding its own. Besides, when comparing the performances of both companies, Schlumberger didn't significantly outperform below the top line. Operating income grew 1% sequentially, while arriving flat year over year. Likewise, income from continuing operations was a little soft at $1.44 billion, arriving flat sequentially, and declined 3% year over year.

This means that amid an equally sluggish environment, Halliburton's 2.5% growth kept pace with the market's leader, while it widened the gap between itself and Baker Hughes.

International expansion still the growth driver
Even with the better-than-expected performance, the Street is not so certain about Halliburton's ability for the next quarter. Average EPS estimates have declined $0.04 from a prior profit of $0.63 per share. Likewise, for the full fiscal year, earnings have been trimmed to $2.97 per share from prior estimates of $3, all of which occurred over the past three months.

Despite the slightly pessimistic outlook, Dave Lesar, Halliburton's chairman, president, and CEO, had this to say about the Q4 performance:

From a revenue perspective, we set new records this year in all of our regions and both of our divisions. From an operating income perspective, we achieved new records in our Latin America region and in five of our 12 product lines. In the fourth quarter, revenue of $7.3 billion was up 3% sequentially and represents the highest quarterly revenue in company history. All three of our international regions and eight of our 12 product lines set new revenue records.

Lesar clearly is steering this ship in the right direction. He also touched on one of the most critical aspects in this sector, which is international growth. This is something Schlumberger has used to its advantage, which has helped the company offset weakness in North America. Conversely, 56% of Halliburton's revenue comes from North America, versus 32% from Schlumberger.

That Halliburton was able to log 20% revenue growth in international markets was encouraging, especially since the company shed 5% in international revenue in the prior quarter. This means that international markets comprised 39% of Halliburton's overall profit growth, proving that this new strategy not only is working well, but is also much quicker than even Halliburton expected.

Remarkably, the company is now outgrowing Schlumberger in international business. But will it be enough to make a meaningful dent in Schlumberger's market dominance? In the meantime, Halliburton has developed an advantage that it didn't have before; an ability to offset North American weakness caused by the glut of natural gas. Considering that the stock has surged almost 10% since the report, the Street agrees. Remarkably, even as shares are now resting near 52-week highs, the stock still looks cheap.

As the international market looks to rebound, investors would be wise to consider Halliburton, one of the top companies in the business and one of those most in tune with the domestic market. To access The Motley Fool's new premium research report on this industry stalwart, simply click here now and learn everything you need to know about how Halliburton is positioning itself both at home and abroad.


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