Unfortunately (or fortunately?), Halliburton (NYSE:HAL) the company is performing much better than Halliburton the stock. Could this be the work of the irrational voting machine that is the market at play, or it could be the more rational weighing machine creating downward pressure over forward-looking concerns? Here are three concerns that could be weighing down on the stock and could cause it to fall even lower.
Concern 1: Low energy prices
In the near to short term, Halliburton barely gives a hoot about energy prices. It makes its money primarily from contracted equipment and services. According to the most recent two earnings conference calls, Halliburton had between 60% and 65% of its contracts coming up for renewal, for which it hoped to pass current and future "expected" inflationary costs onto its customers.
The company was successful and then some in doing so. However, it's a bit of a double-edged sword. Halliburton has successfully cut into the profit margins of its customers while, at the same time, many of its customers are seeing collapsing oil and gas prices. If energy prices keep dropping, it's going to eventually cut into Halliburton's pricing power, or it will inevitably lose customers. Being an energy service and equipment company, Halliburton needs customers who require both with increasing demand.
Concern 2: Contract killers
Halliburton is doing extremely well currently, but doesn't seem to talk much about the ultimate long term. During the most recent conference call, CEO David Lesar stated, "Although double-digit growth may be a challenge for any service company next year, we fully expect to continue to outpace our peers in revenue growth whatever market is handed to us."
Part of the uncertainty may be with the fact that most of its contracts are set on an annual basis. For example, in presentation in September, CFO Mark McCollum mentioned between 92 and 93% of the company's business comes from contracts with between 60 and 65% rolling over in Q3 and Q4 alone. If the macro energy environment remains weak, this could be a serious threat to Halliburton's power at the negotiating table.
Concern 3: Geopolitical
As an example of good news, Halliburton expects to be awarded $1 billion in new work in Iraq. The bad news is that Iraq as a region is unpredictable. Industry-wide work in Northern Iraq got all but shut down recently because of violence. Halliburton fortunately happens to mostly perform work in southern Iraq where things are more stable – for now.
Other places such as Mexico and areas in Latin America have experienced periods of down time due to "social disruptions," which is a polite term for protests and/or violence. More examples came from President Jeff Miller, who stated, "There clearly are some headwinds when we look around the world right now. So the North Sea, Russia and Libya are clearly going to present headwinds."
If something new and prolonged pops in regions where Halliburton operates, it can have lasting negative consequences on results. For example in Latin America, Halliburton generated 22% of its revenue there last year.
On the very positive side, there seems to be little concern of self-inflicted incompetence coming from Halliburton. The company operates and executes like a well-oiled machine. However, its operations and future are very much out of its control and subject to the forces of politics, energy prices, war, and civil unrest. The company is less in control of its destiny than the various market forces. Any one severe negative change could send Halliburton's fundamentals and stock price into a tailspin. Overall, I like the risk-reward ratio with the company and the stock, but the risk aspect should be noted and not ignored.