Being in the oil and gas equipment and services business, one of the last things a company like Halliburton Company (NYSE:HAL) wants to see is cheap energy prices. After hitting a record high level of $74.33 back in July, the company's stock has been in a bit of a free fall, tumbling alongside oil prices. Here are three reasons why the drilled-down stock price may start to gush upwards again.
Reason 1: Higher oil prices
It may be a bit premature that Halliburton is falling on oil prices in the first place. Granted, cheap oil makes certain projects less economical than others, and the service industry in general is healthier when there is more demand and funding for projects. But oil prices are still at historically high levels, and demand to extract more of it isn't going away anytime soon.
According to the U.S. Energy Information Administration, or EIA, weak oil prices have been driven "in part by new pipelines delivering crude oil to refining centers along the Gulf Coast [and] crude oil inventory levels at the Cushing, Oklahoma, storage hub."
Trying to accurately figure out oil prices months from now can be as difficult as trying forecast the weather, and even the EIA is unable to make accurate forecasts. The EIA says forecasts are "highly uncertain," which should tell you anything is possible. If oil and/or gas prices begin to rise again, this could lead to more confidence in companies like Halliburton and result in their stock prices rising.
Reason 2: The contract killer
According to CFO Mark McCollum, between 92% and 93% of Halliburton's business is on contract. During a presentation in early September he stated, "60% to 65% of those contracts roll in Q3 and Q4." I wouldn't be surprised if historically that fact is the reason why Halliburton tends to have its best EPS beats versus analyst estimates when the Q4 report comes out.
McCollum stated in a roundabout way the company's intention to not only pass on higher costs to its customers but to anticipate higher costs down the road and price them into the new contracts now. He explained, "That allows us to set pricing in a way that gets ahead of this issue rather than operating from being behind." It also allows Halliburton to realize higher profit margins. That's great for shareholders, and word of negotiated contract success could mean higher stock prices.
Reason 3: Money talks
It's interesting to note that Halliburton pays a tiny dividend while also aggressively buying back shares. The company pays a $0.15 quarterly dividend, or $127 million per quarter, yet the authorization for the stock buyback stands at $6 billion, effectively dwarfing the dividend payout.
If you've read my articles before, you know that I'm a huge fan of buybacks and the upbeat message they communicate. With a buyback equal to 47 quarters or nearly 12 years of dividends, this says that the company is extremely confident that its share price is undervalued.
Halliburton could just as easily boost the dividend significantly, even doubling or tripling it, but it instead opts to buy back shares. At current levels, this is over 10% of the market cap and should also serve to boost EPS by at least 10% unless the share price shoots up again first.
As always, optimistic words are one thing, but nothing speaks louder about a cheap stock price than a management that is willing to throw this level of cash at it.
Foolish final thoughts
Meanwhile, since reaching its peak in July, Halliburton analysts haven't lowered their earnings estimates. In fact, they've even raised them a bit. Based on that you are getting the same or higher earnings today as you would have gotten if you bought at $74.33 per share.
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