For oil and gas companies, there's nothing more important than reserves, rigs, submersibles, and refineries. However, to be truly valuable, these assets must be capable of generating profitable returns.
Value for money
It makes little sense for an oilfield services company to own a lot of drilling equipment but be unable to use them to full capacity. In short, you have to understand how valuable these assets are to the company. Today we'll look at Halliburton (NYSE: HAL) and see how efficiently the company uses its resources.
To help with our evaluation, we can look at some important metrics:
- Return on assets, or net income divided by total assets, indicates how efficiently the company generates profits for every dollar of assets it owns. A higher value indicates that the assets are more valuable. The metric is pretty useful when used as a comparative measure -- against peers and the industry in general. Typically, ROA for Halliburton's peer group in the oilfield services industry is about 6.5%.
- Fixed-asset turnover ratio, or revenues divided by total fixed assets, indicates how efficiently the company's refineries are generating revenues. The higher the turnover rate, the better. For these companies, a value above 2.3 times looks pretty good.
- Total enterprise value/TTM EBITDA shows how expensive the company looks when compared against its trailing-23-month earnings before interest, tax, depreciation, and amortization.
This is how Halliburton stacks up against its peers:
|
Company |
Return on Assets (TTM) |
Fixed-Asset Turnover Ratio |
P/B |
TEV/ TTM EBITDA |
|---|---|---|---|---|
| Halliburton | 14.2% | 3.3 | 1.96 | 4.6 |
| National Oilwell Varco (NYSE: NOV) | 8.1% | 6.9 | 1.54 | 6.7 |
| Baker Hughes (NYSE: BHI) | 7.4% | 2.8 | 1.11 | 5.1 |
Source: S&P Capital IQ.
Halliburton generates the best returns among its peers. The company's ROA and fixed-asset turnover are well above the industry average. To me, this isn't a big surprise. Its approach in providing its clients with a complete range of services has proved to be successful. In the first quarter, revenue from its primary Completion and Production segment rose a solid 35% year over year, while the Drilling and Evaluation segment saw a corresponding 22% increase. Management calls what it has a hyperefficient business model where the services provided go beyond the normal 24-hour operations.
What's more, Fool analyst Rex Moore shows that Halliburton's balance sheet isn't bloated with assets that just pretend to show their weight on paper. They are real and tangible -- a positive sign of asset quality.
The stock has fallen nearly 39% in the past 12 months, and this drop might be unjustified. With a price-to-book value of currently less than 2, Halliburton could be trading cheap. Long-term investors looking for a bargain might find this one interesting.
Foolish bottom line
Given the long-term opportunity from emerging economies, Halliburton may well be undervalued. The company also pays a dividend, which currently yields 1.2%.This might be an excellent opportunity to grab a few shares. If you'd rather be on the sidelines and watch the company for a while before jumping in, add it to your personalized Watchlist. It's free.
Meanwhile, safeguard your investments by checking out "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost.
