Oil services stocks have soared in 2022 and have been one of the few bright sparks in a declining stock market. With a whopping 80% rise in 2022, Halliburton (HAL 0.73%) has been one of the standout winners as oil has soared above $100 a barrel this year. Is now the time to join in buying into the stock or bail out? Here's what you need to know.
The near-term outlook is great
First things first, the near-term outlook is excellent. The price of oil is back above $100 a barrel, and following seven years of relative underinvestment (triggered by the slump in the price of oil in 2014), oil rig counts are on the rise again.
While still not at 2019 levels, rig counts are currently in an uptrend.
The improvement is good for oil services companies, and it's excellent news for Halliburton. The chart below shows the mirroring of rising rig counts with Halliburton's segment sales over the same period.
There are three key points to note. First, sales are clearly in recovery mode. Second, the more cyclical completion and production segment's sales have, so far, recovered relatively slowly -- implying there's a possible surge in spending to come due to the high price of oil. The argument is that an increase in spending hasn't occurred just yet. Third, Halliburton's sales are nowhere near the 2013 levels, let alone 2019.
Moreover, Halliburton is gaining momentum in 2022. On the recent first-quarter earnings call, CEO Jeff Miller told investors he expected "international activity to gain momentum in the second quarter" and "further accelerate in the second half of the year."
Regarding North America, Miller upgraded his growth estimate for customer spending in 2022 from 25%, noting, "my outlook has improved, and I now expect North American spending to increase by over 35% this year."
Everything points to a company with powerful momentum right now. Furthermore, given the tightness in oil supply created by the conflict in Ukraine and sanctions imposed on Russia, it's likely supply dislocations will continue.
A long-term growth market?
Halliburton's sales are still short of where they have been in the last decade. That's a bullish sign as it could indicate a multiyear recovery ahead. It's a view that Miller holds due to a subtle argument.
As discussed on the earnings call, he believes, in this cycle, "most investments will be directed primarily toward short-cycle activity in the near and medium term." In other words, there will be relatively more annual investment decisions made in response to price movements (short-cycle spending) as opposed to heavy up-front capital investments that require a long-term investment horizon (long-cycle spending).
The difference is that should demand for oil moderate, there should be less of a slump in prices because supply can be tweaked down easier (short-cycle) than if long-cycle investments had been committed. The result should be more of a sustained uptrend in spending in the industry, provided demand stays high.
Miller conceded that its "hydraulic fracturing fleet remains sold out" in North America, and "the overall market appears all but sold out for the second half of the year." That suggests Halliburton will be able to command strong pricing in its core North American market in 2023, provided demand continues to exceed supply.
Two notes of caution
It's a compelling argument, and it's hard to argue the near-term outlook isn't excellent. That said, it's worth noting two views:
- One of the reasons oil majors are less willing to commit to long-cycle investments is the pressure against fossil fuels coming from the clean energy transition.
- Oil demand is still a significant factor in determining commodity prices and spending, and slower global growth will negatively impact both.
Putting these points together, many investors might conclude that it makes more sense to look at an industrial metal like copper or even gold or silver as a way to play the commodity investment theme.
A stock to buy
Don't be surprised if Halliburton does well over the near term, as it has good earnings momentum behind it. Moreover, it could continue well into 2022, provided oil demand holds up. However, if you are thinking long-term, the picture is far from clear, and sentiment could turn sharply against the oil services sector if the price of oil moderates and investors start to fret over the future of fossil fuels.