Going into this quarter, I had wondered whether expectations for Halliburton (NYSE:HAL) were running a little hot and whether that might set the company and stock up for a tough post-quarter reaction. I don't know whether it was the lack of major upside to second quarter numbers or management's comments that the pace of oil spill settlements has slowed, but the shares were a little soft in early trading Monday morning. Although Halliburton is not really my favorite company in the energy service space, it's hard for me to ignore the value and I believe this remains a good candidate for investors looking to play the rebound in North America and the future growth in offshore and international unconventional development.
A Decent Result In A Tough Stretch
On both a relative and absolute basis, I'd say that Halliburton did pretty well. What's more, investors and analysts may regard the company's $5 billion share buyback announcement as further evidence that the company has moved past the worst of the down-cycle in North America.

SEE: 5 Biggest Risks Faced By Oil And Gas Companies
Revenue rose 1% this quarter, which was actually the worst of the Big Three (including Baker Hughes (NYSE:BHI) and Schlumberger (NYSE:SLB). On a sequential basis, though (and that's the comparison most investors follow in this sector), revenue rose by the same 5% as everybody else. North American revenue fell 8%/rose 3%, which again was identical on the sequential side. For international revenue, Halliburton saw 14%/8% growth – the best of the three, though not be a lot (Schlumberger was up 6%, Baker Hughes was up 7%). As has been the case, a tough Canadian breakup pressured North American results, while a field closure ahead of new contract awards in Mexico slowed LatAm performance.
On the margin side, Halliburton's performance was a little more mixed. Gross margin did improve sequentially, and operating income was up almost 15% from the first quarter. That was good for better than one point of margin improvement, and Halliburton sits basically midway between Schlumberger and Baker Hughes in terms of its operating margin (Schlumberger being the top of the heap).
Is Pressure Pumping Going Higher From Here?
The future of the fracking/pressure pumping market is a big question for Halliburton as it is the market leader. Pricing seems to be stabilizing (or turning slightly higher), though, and Halliburton has about 75% of its fleet working 24 hours a day. As rivals (including smaller C & J Energy Services (Nasdaq: CJES)) have backed off some on capacity additions, it looks like the market could turn relatively quickly if demand comes back.
Of course, E&P companies have their own agendas and one of those is to reduce well costs. Moving to pad drilling and holding off on more iffy acreage helps, but there's still a fundamental tradeoff that companies like EOG (NYSE:EOG) face in their prime operating areas – skimp on fracking stages and proppant use and see less production, or pay up and generate better flow through the well. While exploring for oil is still a very worthwhile endeavor, the state of the gas drilling market is still a challenge for companies like Halliburton.
Go Offshore And Overseas
Like Schlumberger, Halliburton is looking to benefit from expanding activity overseas and offshore. Australia and China haven't even begun to develop their unconventional reservoirs in a meaningful way, and expectations are that these major service companies should benefit when they do (though IP issues in China are still a concern). Likewise, Halliburton is looking to leverage its strong position in offshore tools/production enhancement, even in the face of Schlumberger's OneSubsea joint venture.
The Bottom Line
In terms of quality, it's hard to beat Schlumberger as a top pick in the services space. Likewise, there are other stocks like Core Labs (NYSE:CLB) that offer more particular leverage to trends like declining fields. But I wouldn't just skip over Halliburton. The company's leverage in fracking/pressure pumping is a threat and the company does have some gaps in its service offerings, but it is a global player with the scale to be competitive – and who's to say that a deal or two couldn't plug some gaps, and/or that new products (like the Q10 pumps developed with Apache (NYSE:APA) and Caterpillar (NYSE:CAT)) don't have some upside.
At a 7.5x multiple to future EBITDA, Halliburton would trade at roughly $50, and that seems like a fair price today. Baker Hughes may hold more upside if its can put its execution issues behind it, but Halliburton looks like a less risky way to take advantage of the next leg up in oil and gas exploration activity.

Related Articles
  1. Markets

    What Drives Oil Prices?

    Have you ever wondered why oil’s price fluctuates more than the value of other investments?
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Obama Floats $10 a Barrel Oil Tax

    President Obama intends to propose a $10 a barrel tax on oil; consumers might have to cough up 25 cents more per gallon.
  4. Investing News

    Gartman: Oil Swings to Flatten Out at $27-$47

    Trying to figure out if oil has bottomed? The opinions of the names listed below might give you some insight.
  5. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  6. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  7. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  8. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  9. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  10. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center