Halliburton 2016 In Review: All Is Well That Ends Well?

The year 2016 came with a number of ups and downs for the oil and gas sector in general, and for Halliburton (NYSE:HAL) in particular. The year began at a disappointing note for the industry with crude oil prices dropping to multi-year lows of around $26 per barrel, causing the world’s second largest oilfield services company’s stock to tank to roughly $28 per share, marking its lowest price over the last 52 weeks. This painted a gloomy outlook for the commodity markets, resulting in a severe sell-off of oil and gas stocks by investors globally. As a result, the dynamics of the Halliburton-Baker Hughes merger changed drastically, making it uneconomical for the former to go ahead with the transaction.

Consequently, the US-based oilfield contractor had to pay a sum of $3.5 billion to its closest rival, Baker Hughes (NYSE:BHI) as termination fees for failing to complete the deal. With the company’s declining profitability due to a weak price environment, this notable cash outlay became a drag on the company’s financial position. Thus, the diminishing cash flows, and rising debt, made the investors anxious about the oilfield contractor’s ability to weather the commodity down cycle.

However, things changed when due to unforeseen events, such as the wildfire in Alberta, Canada, and disruption of oil supplies in Venezuela and Nigeria, oil prices began to shoot up in the second quarter of the year, touching the $50 per barrel mark for the first time in the year. This was followed by a wave of hope in the industry, with the major players in the sector reporting a significant improvement on the back of the rebound in oil prices. Yet, Halliburton recorded a weak second quarter due to the sluggish drilling demand and pricing pressure in the industry.

That said, based on the industry trends, Halliburton took the second quarter of 2016 to be the tipping point for the global rig count (Read: Are The Commodity Markets On The Road To Recovery?) and estimated a recovery in commodity prices over the next few quarters. This trend indeed became a reality, with the global rig count increasing from 1,405 units in the month of May, to 1,678 units at the end of November, representing a rise of more than 16% in the last six months. Accordingly, Halliburton displayed an evident improvement in its third quarter profits, both annually as well as sequentially. The company took the market by surprise by posting a profit of 1 cent as opposed to a loss of 7 cents, as expected by the analysts. This reiterated the company’s stance that the commodity markets are on the path of recovery and the company’s profitability is likely to bounce back over the next few quarters.

Source: Baker Hughes Rig Count Data

Finally, towards the end of the year, the Organization of Petroleum Exporting Countries (OPEC) announced its decision to restrict its cumulative oil production at 32.5 million barrels of oil per day (bpd) in order to improve the oil prices. This agreement was augmented by Non-OPEC members, such as Russia, who are likely to cut another 558,000 bpd of oil output over the next few quarters. This news caused the WTI and Brent crude oil prices to shoot up to almost $53 per barrel and $56 per barrel, respectively, bringing some optimism to the market. Since the announcement of this deal, Halliburton’s share price has increased close to 13%, indicating that the market expects the company to recoup its lost value as and when the commodity prices rebound. However, the US oil output continues to play a crucial role in the recovery of oil prices and the commodity markets.

Going Forward

Despite the volatility in the commodity markets, the company has held a firm ground in the current turbulent times, and its stock has been up approximately 56% since the beginning of 2016. Given the rise in crude oil prices in the last couple of months, we expect Halliburton to report strong December quarter results in January 2017, making it a decent year overall for the company. Further, given the company’s high exposure to the North American drilling markets, it is likely to recover faster than its competitor, Schlumberger (NYSE:SLB), providing an upside to its investors. (Read: How Will Halliburton’s Over Exposure To North American Markets Impact Its Profits?)

We currently have a price estimate of $49 per share for Halliburton. We will revisit our estimates post the fourth quarter results next month.

Have more questions about Halliburton (NYSE:HAL)? See the links below:

• Here’s Why Trefis Has Revised Halliburton’s Price Estimate To $49 Per Share
• Halliburton’s Positive 3Q’16 Results Bring Hope For The Oilfield Services Industry
• Schlumberger Versus Halliburton: Who Is Delivering Better Returns?
• Are The Commodity Markets On The Road To Recovery?
• How Will Halliburton’s Over Exposure To North American Markets Impact Its Profits?
• Halliburton Reports Depressed 2Q’16 Earnings Due To Persistently Low Drilling Demand
• Sluggish Drilling Demand Will Continue To Pull Down Halliburton’s 2Q’16 Results
• Halliburton’s 1Q’16 Earnings Plunge As Drilling Activity Remains Low, Particularly In North America
• How Will The Halliburton-Baker Hughes Deal Failure Impact Halliburton’s Equity Value?
• How Will The Halliburton-Baker Hughes Deal Impacted Halliburton’s Credit Capacity?

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Halliburton Company

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