Building models and calculating price targets for energy service companies like Halliburton (NYSE:HAL) almost feels like an exercise in futility. Not only is the business maddeningly inconsistent, but there is only scant evidence that investors pay much attention to valuation. More often, energy services are simply a trading vehicle for attitudes about near-term exploration and production in oil and gas.

That said, Halliburton is seeing stronger business conditions and with oil prices as high as they are, the near-term outlook for exploration and production should be quite healthy. (For more, see Unearth Profits In Oil Exploration And Production.)

Tutorial: Guide To Stock Picking Strategies

North America Drives the Quarter
Halliburton delivered strong revenue performance to start the year, driven in large part by momentum in the North American business. Overall revenue jumped 40% from last year and rose more than 2% on a sequential basis. Completion and production saw better than 6% growth (and made up about 60% of total revenue), while the drilling and evaluation segment saw a 3% contraction. North American revenue jumped 13% sequentially, while business in regions like Africa, Europe, Russia, Asia and the Mideast dropped by double-digit amounts.

Profitability was not as impressive, as operating income fell almost 11% sequentially (though nearly doubling from last year). Costs seemed to be generally higher across the board, but margins were notably stronger in North American than in the OUS markets. It will be interesting to see, then, whether investors choose to focus on the above-expectation revenue (as the sector seems to be strong) or the below-expectation profitability, though management does seem to believe margins will pick up as the year progresses. (For more, see Oil Services Sector Powered By North America.)

Plenty of Projects on the Way
Halliburton does not appear to be lacking in new business prospects. Companies like Continental Resources (NYSE:CLR), Whiting (NYSE:WLL) and Hess (NYSE:HES) are moving quickly to exploit resources in the Bakken formation, and the Eagle Ford in Texas is likewise very active right now.

Looking abroad, major oil giants like Statoil (NYSE:STO), Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) have all tapped Halliburton for major projects. What's more, with Saudi Aramco surprising the market recently with an increase in rig demand, there is definitely a lot of activity coming on around the world.

Will Halliburton Match R&D with Deals?
Not much is made of R&D in the energy services space, but it has long been a major differentiating factor companies like Halliburton and Schlumberger (NYSE:SLB). Some of these new products and procedures can increase well and reservoir productivity by 20% or more, and that is no minor consideration for energy companies under pressure to maximize their production and earnings potential. While it is true that dollars of R&D spending do not automatically translate into new products, the sheer scale of Halliburton and Schlumberger give them advantages over smaller companies like Weatherford (NYSE:WFT).

Along similar lines, it is worth wondering whether large energy services companies will look to boost their growth potential and scale through further acquisitions. Companies like Superior Energy Services (NYSE:SPN) and Weatherford could get a bid if that were to be the case, though its unclear whether Halliburton would run into some antitrust issues.

The Bottom Line
Cash flow modeling for energy service companies like Halliburton is almost a lost cause. That leaves less rigorous methods like EV/EBTIDA as common ways to assign price targets and value these companies. To that end, Halliburton seems to be trading at a bit of a premium. That is not unexpected or unusual when investors are bullish about the sector's prospects, and there are plenty of reasons to be optimistic about energy services today. Halliburton isn't a bad play on the sector, but investors have to make their peace with volatile results and dodgy valuation methodologies. (For more, see The Value Investor's Handbook.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... 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. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. 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 >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. 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 >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!