It's not uncommon for energy service stocks to do well around the turn of the year. Maybe it's the optimism that a new year brings, or a byproduct of the excitement that energy companies often try to drum up about their drilling plans for the coming year. Whatever the case, Halliburton (NYSE:HAL) has enjoyed a strong run since mid-November with shares climbing more than 30%. Much as Halliburton's fourth quarter does validate some long-term optimism about the business, investors may want to be careful in just how enthusiastically they chase this name right now.

SEE: Key Ratios For Analyzing Oil And Gas Stocks

Fourth Quarter Results - Anywhere but Here
Although investors had been conditioned not to expect great things from the energy service players this quarter, Halliburton did pretty well.

Revenue rose 3% both year-on-year and sequentially, as the company benefited from robust growth overseas that helped offset ongoing weakness in North America. While North American revenue fell 9 and 5%, respectively, international revenue rose 20 and 12% with particularly strong performances in Latin America and the Mideast/Asia segment.

Halliburton did even better on profits, however. Overall gross margin was weak (down seven points annually and flat sequentially), and operating income dropped a third from last year, but analysts had expected considerably worse. North American operating income was cut by more than half, while international income rose almost 40% and margins improved by nearly two and a half points.

SEE: Guide To Oil And Gas Plays In North America

Has North America Stopped Getting Worse?
While Halliburton has made impressive strides to grow its international business, the company's North American operations are still highly significant in the overall mix. To that end, Halliburton didn't really say much different from what we've heard from the likes of Schlumberger (NYSE:SLB) or Baker Hughes (NYSE:BHI) recently. North America is probably close to the trough, but full-year rig counts for 2013 are likely to remain below full-year 2012 numbers.

Relative to Schlumberger and Baker Hughes, Halliburton still has troubling exposure to pressure pumping where pricing is still very weak. Rolling out new Q10 frac pumps will probably help, but the simple truth is that Halliburton needs higher natural gas prices before North American revenue and margins can really recover. This is one of the reasons I generally prefer Schlumberger. Halliburton does better when fracking/pumping is hot (and is certainly a better play on a recovery there), but Schlumberger has a better overall suite of products and services.

International Has to Carry the Load in 2013
Halliburton has made a point of getting stronger in international markets, and it seems to be paying off. International markets ended the quarter/year strong, and Halliburton expects ongoing strength next year - particularly in the Eastern hemisphere. While probably not a 2013 event, investors should keep an eye on China. Shale gas development is getting under way there, and while local plays such as Anton Oilfield Services Group (OTC:ATONF) may hold appeal for more adventuresome investors, Halliburton could have a real opportunity there in the future.

SEE: Investing In Oil And Gas UITs

The Bottom Line
Energy service company valuation is probably more art than science, particularly as methods such as long-term discounted cash flow just don't work very well. EV/EBITDA is one of the preferred metrics, but even that has some catches when it comes to Halliburton. The company would likely trade at a multiple of eight to nine times during good times, but investors are currently giving the company a multiple of around six times - less than they are willing to pay for Schlumberger. I don't think Halliburton has proven that it deserves full parity with Schlumberger today. But a multiple of seven times on 2013 estimated EBITDA would suggest a fair value near $50 and still more upside to this seasonal run in the stock.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Stock Analysis

    The Top 5 Platinum Penny Stocks for 2016 (PLG, XPL)

    Examine five penny stocks in the platinum mining business that investors may wish to consider adding to their investment portfolios for 2016.
  8. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  9. 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.
  10. Fundamental Analysis

    4 Predictions for Oil in 2016

    Learn four predictions for oil markets in 2016 including where prices are heading and the key fundamental factors driving the market.
RELATED FAQS
  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 >>
COMPANIES IN THIS ARTICLE
Trading Center