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.