What: Analyst James Schumm at Oppenheimer maintained an analyst rating of outperform on Halliburton (NYSE:HAL) while reducing the company's price target to $60.
So What: According to Schumm, he expects that the rig count -- a proxy for drilling activity -- will decline by 28% this quarter compared to the previous one and that this rig count decline and other lower service activity will translate to North American revenues for these companies to decline somewhere in the 27%-32% range. Since the decline in rig count will happen so quickly, he anticipates that drilling activity will be at its lowest in the second or third quarter of the year and will start to tick back upwards afterwards.
That part of the report shouldn't be that surprising, everyone and their mother knows that low oil prices are forcing producers to scale back on spending, which results in lowering drilling activity for services companies like Halliburton. What should surprise people that read the report, though, is that the lowered price target for Halliburton still represents a 45% increase from today's share price. Schumm also says that downturns in the market for oil services companies tend to happen slightly in advance of rig counts hitting their lowest point, which is a slight hint that he foresees this as the low point for shares of Halliburton and other oil services companies.
When the dust settles on 2015, Schumm estimates that Halliburton will close the year with an earnings per share of $1.70.
Now What: While all of these things sound logical, there are simply too many things going on in the world of oil and oil prices that no one can reliably predict when the market will turn around. On the one hand, you have declining production from the U.S. thanks to reduced spending, but at the same time there are several places around the world that produce large amounts of oil and gas that could come back online.
The lesson here should be that if you are building an investment thesis on Halliburton, it really shouldn't revolve around expecting the market to rebound soon and that you will be able to capture gains as the industry picks back up. If that is the case, then you could be tempted to sell if the downturn lasts longer than what Mr. Schumm anticipates in his report, or it will make you overly fearful of exiting before the next industry downturn.
Instead, you should look at this more as an opportunity to pick up shares of a company that has proven itself as one of the stronger oil services companies in the space that generates strong returns for shareholders. Also, it's even more tempting to consider shares provided the discount at which they trade today.
While there is still some uncertainty how exactly the purchase of Baker Hughes (NYSE:BHI) will result in a higher rate of returns, the bottom line is that Halliburton is one of the two top-flight oil services companies in the world. Even if the company can't reach that ambitious price target in the next year or so it's still a pretty compelling investment today.