EUR 850.00 For Business Accounts Only

Morningstar | Halliburton Shares Drop on Updated Company Guidance, Moving Closer to Our FVE

Halliburton shares dropped precipitously upon release of the company’s second-quarter results, ending the day down 8%. The impact rippled through the sector, as several other shale-focused oilfield services firms were also significantly down on the results. Although Halliburton’s actual second-quarter results did not disappoint with respect to consensus expectations, management offered very disappointing new third-quarter guidance, including EPS about $0.10 (or 14%) lower than pre-existing consensus estimates. Our own $36 fair value estimate and narrow moat rating for the company are unchanged. Even after the drop, Halliburton’s shares remain 15% overvalued relative to our fair value estimate.

The first key reason for Halliburton’s lowered guidance relates to the necessity of lowering U.S. shale activity levels in the second half of 2018 in response to Permian Basin pipeline takeaway constraints. This has been a highly visible issue to the market, and moreover it will only have a short-term impact on the profitability of U.S. shale-focused services firms (and likely with a compensatory catch-up period once the takeaway constraints are resolved). Therefore, it is puzzling that shares dropped so dramatically in response to the news.

Perhaps instead, markets keyed in on the second reason management offered for a weakened outlook: pricing pressures from competitors’ increased capacity in some business lines. This factor is a more plausible determinant of Halliburton’s long-term value and is very much in line with our long-held thesis that amplified competition will restrain Halliburton’s long-term profitability in key U.S. shale-focused business lines like pressure pumping. Whether the market’s downrating of Halliburton represents a newfound concurrence with our thesis is unclear, but, in any case, the company’s shares are rapidly converging toward our fair value estimate, having fallen nearly 25% over the past two months.

As we noted, the actual second-quarter results were unsurprising. Halliburton’s revenue increased 7% sequentially and adjusted operating margins improved to 12.8% from 10.8%. Essentially all of the improvement was contributed by the shale-focused completion and production segment, with North American pressure pumping playing a leading role, as it has throughout the oil and gas recovery thus far.