Why Halliburton Is a Stock to Avoid

Halliburton (HAL) recently announced third-quarter revenue of $5.6 billion, down 6% sequentially from $5.9 billion in the second quarter. The year-over-year decline was more severe at 36% from $8.7 billion in the third quarter of 2014.

Halliburton also posted a net loss of $54 million, down from the net income of $54 million in the second quarter of 2015 and net income of $1.20 billion in the third quarter of 2014. Thus, Halliburton reported significant year-over-year and somewhat sequential decline in both its top and bottom lines primarily due to the ongoing weakness in the energy market.

A falling rig count is a headwind

The 2014 rig count index has already declined 53%, which is comparable to the 56% drop in the index level for 2008 till 2011 and still downwards trending with no floor reached till date.
Importantly, Halliburton has notably performed better than several of the benchmark indexes, delivering year-to-date return of about 15.76% compared to the SPDR S&P Oil & Gas Equipment & Services ETF and the Energy Select Sector SPDR Fund indexes, which have offered year-till-date returns of -0.34% and -0.20% respectively.

But, Halliburton’s key competitors Chevron (CVX) and Southwestern Energy (SWN) have delivered returns of nearly -6%. However, the forecasted earnings growth rate and P/E growth rate for Halliburton with the analysts that evaluate this company are estimating it to expand earnings at an average yearly rate of 6.38%. For this year, analysts expect earnings to decline 63.33% compared to last year. For next year, the key analysts forecast the company earnings to grow by 4.51% as against present year’s estimated earnings. The P/E ratio for Halliburton is believed to grow somewhat from 25.41 in 2015 to about 26.50 in 2016.

Halliburton is observed to be successfully offsetting the impact of the global weaker commodity demand and pricing environment through excellent process execution and superior cost control, better than most of its peers and leaving behind the industry’s average performance.

Halliburton is continuing to invest in improving the capital equipments, technology up-gradation and into the strategic acquisition of Baker Hughes. Therefore, Halliburton spent $62 million on this key acquisition which is believed to enhance the company’s reserve count and thus grow production and profitability.


Overall, the investors are advised to avoid making equity investments in Halliburton Company looking at the poor company growth prospects with PEG ratio of -3.93, depicting no growth but decline compared to somewhat healthy industry’s growth average of 0.07. Moreover, Halliburton is debt-burdened with significant total debt of $7.84 billion against weaker total cash position of $2.82 billion only, restricting the company to continue with its operations profitably.

The trailing P/E and forward P/E ratios of 21.24 and 30.89 respectively suggest an overvalued stock. So, there are enough reasons to avoid an investment in Halliburton.
Published on Oct 24, 2015
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

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