Morningstar | After Poor 3Q Results, Halliburton Shares Finally Trading in Line with our FVE
After Halliburton shares sank 3% following disappointing third-quarter results, the company is now finally trading in line with our fair value estimate of $36 per share, which remains unchanged after the results. This marks the fulfillment (for now) of our long-held bearish view on the company--just five months ago, Halliburton shares looked astonishingly almost 50% overvalued to us. Since then, shares have tumbled as the market has recalibrated its expectations of the company’s U.S. shale-focused business lines (particularly pressure pumping) much closer to our bearish view.Halliburton experienced flat revenue as international growth of 5% offset a North American decline of 2%. Adjusted operating margin dipped to 11.6% from 12.8%--we estimate that North American operating margins fell about 200 basis points. The North American headwinds stem from stagnant U.S. shale activity levels (ultimately due to Permian oil takeaway constraints), which have particularly affected the flagship pressure pumping business of the company.
While it is plausible that the market is overreacting to the impact of near-term developments, in the long run this will prove irrelevant--we believe the pressure pumping market will remain fiercely competitive even after Permian and overall U.S. shale activity levels rebound (likely after mid-2019). This is due to the minimal barriers to entry in the industry, as we’ve discussed extensively.
Like its peers, Halliburton management continues to guide for solid international growth and profitability improvement in 2019, offsetting weakness (particularly in the first half) in North American markets. Nevertheless, our models already incorporate plenty of international improvement in 2019 and beyond.
Halliburton assists its customers throughout the lifecycle of the reservoir, from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion and optimizing production throughout the life of the asset. The company's segments are: Completion and Production, which delivers cementing, stimulation, intervention, pressure control, specialty chemicals, artificial lift and completion products and services; and Drilling and Evaluation, which provides field and reservoir modeling, drilling, evaluation and wellbore placement solutions that enable customers to model, measure, drill and optimize their well construction activities.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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