Assisted by high benchmark prices, rig count numbers in the U.S. have observed a strong uptick as the commercial crude oil inventories continue to decline. Per EIA, production in the U.S., OPEC+ nations, and other regions is likely to outpace demand in the coming quarters. Thus, oil field service firms including Halliburton (NYSE: HAL) are expected to observe top-line recovery and improving cash flows. However, EIA expects Brent to average at $66/bbl in 2022, nearly 20% below current levels, putting pressure on the company’s long-term earnings. Thus, Trefis believes that HAL stock has reached its near-term potential with the likelihood of a correction by next year. We highlight the quarterly trends in revenues, earnings, stock price, and expectations for Q3 2021 in an interactive dashboard analysis, Halliburton Earnings Preview.
[Updated 10/01/2021] – Is There A Better Alternative To Halliburton Stock In Oil Field Services Market?
The shares of National Oilwell Varco (NYSE: NOV) currently trade at 45% below pre-Covid levels as observed in January 2020 while the shares of its competitor Halliburton (NYSE: HAL) have almost recovered. Does that make NOV stock a better pick over HAL? Both companies provide oil field services including drilling & completion and production solutions to upstream oil & gas companies in the U.S. and abroad. Due to lower benchmark price expectations in the coming years, NOV and HAL incurred sizable impairment charges in 2020 – leading to more than 20% contraction in their asset base. While HAL stock is a better pick to realize regular dividend income in the coming years, NOV’s lower current valuation multiple (P/S) can provide quick gains to investors as rig count figures improve. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, National Oilwell Varco vs. Halliburton: Industry Peers; Which Stock Is A Better Bet?
1. Revenue Growth
Halliburton’s growth has been stronger than National Oilwell Varco in recent years, with Halliburton’s revenues expanding at an average rate of 12% from $15.8 billion in 2016 to $22.4 billion in 2019. National Oilwell Varco’s revenues observed a 5% average growth rate from $7.3 billion in 2016 to $8.5 billion in 2019. However, HAL and NOV reported a 28% and 36% revenue contraction in 2020, respectively.
- Halliburton’s two operating segments, Completion & Production and Drilling & Evaluation, contribute 63% and 37% of total revenues, respectively. An uncertain demand environment has prompted upstream companies to limit capital expenses and enhance asset productivity. Thus, tighter production has led to an uptick in benchmark prices as the world recovers from the coronavirus crisis.
- National Oilwell Varco’s three operating segments, Wellbore Technologies, Completion & Production Solutions, and Rig Technologies contribute 37%, 32%, and 31% of total revenues, respectively. The company observed broad-based growth across segments due to rising drilling & completion services in the U.S. and other nations prior to the pandemic. Per recent filings, the Rig Technologies segment observed strong growth in the second quarter assisted by demand for renewables.
- Due to lower rig count figures in the U.S. and other nations, Halliburton and National Oilwell Varco observed a 13% (y-o-y) and 21% (y-o-y) top-line contraction in H1 2021, respectively.
2. Returns (Profits)
As both companies incurred sizable impairment charges in the past two years, we compare their cash generation capabilities. In 2019, Halliburton generated $2.4 billion of operating cash with $22.4 billion in total revenues – implying an operating cash flow margin of 11%. Whereas National Oilwell Varco reported $8.5 billion of total revenues and $0.7 billion of operating cash flow resulting in a margin of 8%.
- Halliburton’s cash generation capabilities are much higher than National Oil Varco which has resulted in HAL stock’s quick recovery. In 2020, Halliburton and National Oilwell Varco’s P/S multiple was 1.0 and 0.6, respectively.
- Prior to the pandemic, Halliburton returned 26% of operating cash to shareholders as dividends and invested 62% in property, plant & equipment as capital expenses. Whereas, National Oilwell Varco had been utilizing its operating cash as a part of its growth strategy.
- Both companies have implemented cash control measures and limited capital expenses as well as shareholder returns due to the pandemic. Given Halliburton’s higher cash generation capabilities and historical dividend trends, it is a good pick to earn consistent dividend income. (related: Speculating On Tech Stocks? Why Not Consider Schlumberger Stock Instead)
Per annual filings, Halliburton and National Oilwell Varco reported $9 billion and $1.8 billion of long-term debt, respectively. Both company’s shrinking asset base due to impairment charges and high long-term debt obligations is a drag on long-term shareholder returns.
- Higher financial leverage coupled with continued revenue growth is a boon for generating surplus equity returns. However, interest expenses weigh on finances as revenues decline – limiting dividend payouts and capital expenses.
- Halliburton’s higher financial leverage compared to National Oilwell Varco makes HAL stock a riskier bet.
- Last year, NOV and HAL reported 25% and 20% (y-o-y) contraction in asset base due to impairments. (related: Halliburton Stock Looks Overvalued)
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