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Halliburton's Shine Suddenly Brightens

By David Smith - Apr 23, 2013 at 5:35PM

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The third of of the big oil-field services companies to report, Halliburton has become a lot more compelling.

It's now two to one among the big oil-field services companies regarding the North American oil and gas markets. Through Monday, Schlumberger (SLB 2.62%), the largest company in the sector had expressed concern about the market and its short-term prospects, while Halliburton (HAL 0.78%), the second-biggest member of the group, joined Baker Hughes (BHI) in assessing our continent's activity levels more positively.

One loud beat
Before considering Halliburton's sentiment regarding its markets, it's worth noting that the company reported a loss of $18 million, or $0.02 per share, for the quarter on Monday. However, adjusting for a $637 million charge related to the 2010 Macondo accident in the Gulf of Mexico, the per-share number pops up to $0.67, trouncing the $0.57 consensus expectation from the analysts who follow the company. Revenues expanded by 1.5% year over year to a record $7.0 billion.

Regarding the domestic scene, Dave Lesar, Halliburton's CEO said: "In North America, sequential revenue was down 1% and operating income increased 30%, compared to a 3% decline in the United States rig count. Margins improved approximately 400 basis points as we began to benefit from lower-cost guar (a thickening agent used in hydraulic fracturing), increased customer activity, internal cost efficiencies and higher service intensity."

He noted that these trends provide a degree of optimism about continued growth in the company's margins throughout the year. And beyond that, he's looking to "modest pricing increases" on the basis of new technology adoptions by the customer base, along with heightened well production.

Global strength
Internationally, Halliburton's revenue surged by a healthy 21% year over year. As Lesar was pleased to note: "Compared to our two primary competitors (Schlumberger and Baker Hughes), we have delivered industry-leading year-over-year international growth for the last four quarters."

As if that weren't sufficient, operating income generated in the Eastern Hemisphere was fully 39% higher than the year-ago figure. All four of the company's international regions recorded double-digit revenue growth, although operating income was down 11% in Latin America, due to severance costs in Argentina, mobilization costs associated with new contracts in Brazil, and a dip in the Mexican rig count.

Also, as with its competitors, Halliburton registered meaningful achievements during the quarter, including the above-mentioned new contracts with Petrobras (PBR 2.25%) in Brazil. Those four-year contracts can be expanded for a second equal term, and potentially could result in more than $2.0 billion in revenue for Halliburton. In addition, the company will provide multilateral technology for a pair of mature Statoil (EQNR 3.85%) fields in Norway. That work is based upon a three-year contract, with a pair of possible two-year extensions.

Settling soon?
Clearly one of the keys to evaluating Halliburton involves the difficult task of assessing the company's position relative to ongoing Macondo damages litigation. The company was responsible for cementing the well, which ultimately blew out, resulting in an explosion, fire, and the gushing of 4.9 million barrels of oil into the Gulf of Mexico.

During the company's post-release conference call, CFO Mark McCollum said that for about the past month – and concurrent with a trial that is being conducted in New Orleans – the company has been in settlement talks with parties along the Gulf Coast who suffered damages from the spill. The $637 million charge for the latest quarter mentioned above is the after-tax figure for the $1 billion by which Halliburton has increased its reserve for damage assessments – or settlements.

While management wouldn't comment on the tenor of the talks during the call, it appears possible that a deal could soon wrap up an unpleasant part of Halliburton's history. If not, as McCollum said, the company is prepared see the matter through in the courts.

A bottom-line comparison
With three of the major oil-field services companies all having reported generally positive results, it seems appropriate to take a gander at some of the key statistics for each member of the trio:

Metric

BHI

HAL

SLB

Market Capitalization

$19.2 billion

$36.7 billion

$92.3 billion

5-Year PEG Ratio

1.26

0.77

0.92

Operating Margin

9.81%

15.64%

17.74%

Return on Equity

7.13%

17.84%

15.96%

Total Debt/Equity

29.23

30.53%

31.02

Forward Annual Yield

1.40%

1.30%

1.80%

Sources: Yahoo! Finance and TMF calculations

My first comment would be that, given the relatively low demand elasticity of the group and the apparent brightening of the North American picture, along with international strength in a number of areas, all three companies warrant Foolish attention. Nevertheless, Halliburton became considerably more compelling on Monday than it had been previously.

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Stocks Mentioned

Baker Hughes Incorporated Stock Quote
Baker Hughes Incorporated
BHI
Schlumberger Limited Stock Quote
Schlumberger Limited
SLB
$45.05 (2.62%) $1.15
Halliburton Company Stock Quote
Halliburton Company
HAL
$38.78 (0.78%) $0.30
Petroleo Brasileiro S.A. - Petrobras Stock Quote
Petroleo Brasileiro S.A. - Petrobras
PBR
$14.55 (2.25%) $0.32
Statoil ASA Stock Quote
Statoil ASA
EQNR
$36.96 (3.85%) $1.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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