Halliburton Sees a Significant Market Turn

A market turn and an attractive valuation leave Halliburton in the position for further gains.

Jul 24, 2014 at 11:45AM

The CEO of Halliburton (NYSE:HAL) went on record during the first-quarter earnings call that he saw a turn in the North American energy markets. In fact, the CEO hadn't been that bullish on the area since late in 2011. He recently followed that up with an even more bullish claim that the market has definitely turned to full-growth mode. The question for investors is what to do with this information now that the stock has already soared to all-time highs and is trading up to $74 from only $40 this time last year.

With global oil prices still sitting above $100, the demand for oilfield services continues to expand in almost all regions -- other than the adjustments taking place in Latin America. The demand remains so strong that leaders Schlumberger (NYSE:SLB), Baker Hughes (NYSE:BHI), and Halliburton continue to repurchase significant amounts of shares even after large stock gains in the last couple of years.

Seeing a significant turn
The CEO of Halliburton again stated that a turn has occurred in the oilfield services market. The interesting part is that Baker Hughes continues to document that rig counts aren't seeing any significant gains. Rather, the service intensity is soaring. Halliburton saw North America service intensity levels grow with completion volumes per well up 35% compared to the second quarter of last year. Demand is so robust that the company immediately plans to accelerate additions to the hydraulic fracturing fleet that will reach service by the seasonally strong fourth quarter.

Even outside the gains in North America that produced record revenue, Halliburton saw records from the Middle East and Asia segment. In addition, the Europe & Africa region saw a solid sequential increase in revenue and operating income. The only laggard is Latin America, where transitions in both Brazil and Mexico led to a 39% decline in income sequentially. Outside of that region, business is booming around the world.

Baker Hughes reported that June rig counts over the prior year grew 100 in the U.S. to reach 1,861 and worldwide by 160 to hit 3,437. The numbers show decent growth in rigs, but they further highlight that the future of the industry is in the service intensity and not the absolute rig counts.

Soaring earnings per share
While revenue growth in the second quarter at Halliburton was solid, the most important number is the surging operating income combined with lower shares outstanding to produce substantially higher earnings per share. Total revenue gained by nearly 11% over the prior year period. The EPS surged by nearly 25% to reach $0.91 from $0.73 in the prior second quarter. Again, revenue growth was strong around the world, with margins improving the most in North America, where the company expects margins to approach 20% in the third quarter. Eastern Hemisphere operating margins were only 16% in the second quarter, but the company expects full-year margins to reach the upper teens for the year.

So, while income jumped over the prior year, earnings per share were further increased from the stock buybacks of the past year. Halliburton successfully reduced the outstanding shares by 8.2% from 928 million at the end of June last year. The company even added to the buyback program to increase the total authorization remaining to a substantial $6 billion.

Schlumberger repurchased 11.53 million shares of its common stock during the quarter for $1.2 billion. The average purchase price of $101.85 is looking impressive now considering the current stock price of over $110. The average shares outstanding are only down marginally over the prior year, but the company still generated a solid earnings increase of 19% from improved margins and an 8% gain in revenues.

Even smaller Baker Hughes repurchased $200 million worth of stock during the second quarter, though the number isn't too significant at this point, with the market cap soaring over $32 billion.

Bottom line
With Halliburton calling a major market turn, the significant buybacks of the past year are going to significantly benefit earnings for the company. Though the stock has seen large gains in the last year, it only trades at roughly 14 times forward earnings, which are expected to see a large gain over the next couple of years.

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Mark Holder and Stone Fox Capital clients own shares of Halliburton. The Motley Fool recommends Halliburton. 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.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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