Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons Halliburton Company Stock Could Fall

By Matthew DiLallo – Feb 3, 2016 at 9:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

While the company is gearing for a rebound in 2016, its stock could still get cheaper before that happens.

During the past year, Halliburton's (HAL -0.08%) stock is down roughly 20%, due largely to the continued weakness in the oil market. The company thinks that the weakness will come to an end in 2016 because it believes that the oil market will rebalance, which will lead to higher oil prices and a rebound in oil-field service activities. Despite this outlook, the stock could have further to fall before the eventual rebound takes shape.

Here are three catalysts that could push its stock lower.

1. Oil prices continue to fall
Despite the fact that Halliburton doesn't produce any oil, its stock price is actually pretty correlated to the oil price:

HAL Chart

HAL data by YCharts.

This is because the price of oil has a pretty strong correlation to oil and gas activities. When oil falls, it slows activities, which impacts the volume of work that's sent Halliburton's way. Further, when oil prices are falling, oil companies demand service price concessions from service companies, which puts pressure on Halliburton's margins. If oil keeps going lower, investors can expect Halliburton's stock to follow suit.

2. The Baker Hughes (BHI) merger is blocked
Halliburton and Baker Hughes have had a real tough time convincing regulators that their merger won't stifle competition. To alleviate these concerns, Halliburton has proposed a number of asset divestitures, but it has yet to find the right combination to sufficiently address these concerns. Because of this, there is growing concern that the company might not be able to satisfy regulators, who could move to block the deal.

Such a move would cost Halliburton big time. First of all, it would cost the company a hefty $3.5 billion break-up fee, which was set at approximately 10% of the deal's value, and is more than double the average break-up fee. Further, the company would lose out on the significant future potential it saw by merging with Baker Hughes, including cost synergies of nearly $2 billion on an annualized basis once fully integrated. With billions at stake, if this deal were to fall apart, it would likely cause a big drop in Halliburton's stock price.

3. The oil-field activity rebound doesn't show up
In Halliburton's view, once oil prices begin to rebound later this year, it should lead to an immediate increase in oil-field service activities, as it expects its customers to immediately reinvest any excess cash flow into more wells. It's a view that's not shared by everyone in the industry, with chief rival Schlumberger (SLB -0.20%) not expecting a rebound in oil-field activities until 2017. Schlumberger expects that oil companies will use any excess cash flow generated by higher oil prices to repair their balance sheets.

If Halliburton is wrong about the timing of the recovery, it could have a big impact on profitability. Halliburton will likely increase its staffing level once it sees oil prices begin to improve in anticipation of a rebound in activity. However, if activity level improvements don't coincide with higher oil prices, it would put pressure on Halliburton's margins, and cause it to potentially deliver weaker-than-expected earnings. Investors would likely punish such a misjudgment by selling off the stock. 

Investor takeaway
Halliburton has a number of risks that could cause its stock price to continue falling. The biggest is the risk that the Baker Hughes deal falls through. Not only would that be very costly in the near and long term, but it would likely alter the thesis for investors.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Baker Hughes Incorporated Stock Quote
Baker Hughes Incorporated
Halliburton Company Stock Quote
Halliburton Company
$24.62 (-0.08%) $0.02
Schlumberger Limited Stock Quote
Schlumberger Limited
$35.90 (-0.20%) $0.07

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.