January 27, 2008

Value Idea: Halliburton

Company Overview:

Halliburton Company (HAL) provides a variety of services, products, maintenance, engineering and construction to energy, industrial, and governmental customers. Its six business segments are: Production Optimization, Fluid Systems, Drilling and Formation Evaluation, Digital and Consulting Solutions, Energy and Chemicals, and Government and Infrastructure. It refers to the combination of Production Optimization, Fluid Systems, Drilling and Formation Evaluation, and Digital and Consulting Solutions segments as its Energy Services Group (ESG).

Recent Transactions:

  • Halliburton Company’s Energy and Chemicals, and Government and Infrastructure segments are part of KBR, Inc. (KBR). As of December 31, 2006, the Company held an approximate 81% interest in KBR, Inc. In April 2007, the Company completed the separation of KBR. As a result, the two companies are separate and independent of each other.
  • In January 2007, Halliburton Company acquired Ultraline Services Corporation, a division of Savanna Energy Services Corp.

Business Economics:

  • HAL generates just about 50% of its business from North America much higher than its peers where international revenue dominates. However HAL has made strong moves to boost its middle east business by moving its head quarters close to its target customer base. HAL enjoys strong relationships with the ruling families of the gulf area which will help it cement more business in the region.
  • The world's oil is more frequently being discovered in remote and difficult to get places. Therefore, HAL expertise and technology will be more valuable increasing demand in the years and decades ahead.
  • If oil peak theory is partially valid, the commodity will be dear and getting it out of the ground will be a priority that will earn HAL solid revenue growth in years to come.
  • With a high percentage of total global reserves now in the hands of state oil companies, large, experienced service companies that can provide packaged assistance to countries with less technical sophistication will be especially well-positioned as the replace big oil and the major integrated companies. State oil companies have accumulated the expertise to manage those projects without the help of big oil and now they are contracting directly with the like of HAL and SLB to help them get the oil out.
  • North America business has been depressed due to low natural gas prices and in turn exploration for the commodity have slowed down due to low economic return. But the demand for gas is increasing giving its prices a boost in the future, which in turn will help increase drilling efforts and earnings for HAL.
  • The obvious risk to the company and its competitors is a severe rescission that could lessen demand for oil and thus HAL services depressing earnings.

Business Valuation:

Last Price33.0977.7072.17
Mkt Cap Billions29.192.9 22.9
Earning Yield10.86%5.40%6.22%
Cash Yield9.85%5.75%7.43%
P/E Ratio 1318.516.10
Price to Sales1.85.072.6
Price to Book5.078.584.33
Price to Tangible Book5.6416.035.87
Price to Cash Flow 10.1517.3813.46

  • All companies in this area have strong economics and business ahead of them but I choose HAL on valuation basis. They are undervalued compared to Baker Hughes and SLB.
  • HAL enjoys a discount on comparative basis to its peers, however its earning growth and return on capital is not materially different from them to justify such a discount.
  • I believe HAL has underperformed and valued less than its peers for couple of reasons:
    • Its ownership of the controversial KBR, which originated all Iraq and military scandals. Now that the unit has been spun off; Hal can be a pure oil service company with no political or military affiliation. I believe Hal is still negatively affected by that relation and that is why its share price is not responding well for the positive oil environment. The perception should correct with time making this as an opportunity to buy into a growing company.
    • As we talked above, its large exposure to north America oil and gas sector has slowed its results, but from a long term point view that segment will correct as demand for natural gas increases the demean for well drilling and service from companies like HAL.
  • A discounted free cash flow valuation pigs HAL's intrinsic value at $45-59 per share, which gives you a huge discount of 33-79% from its current trading levels.


Attractive valuation, positive trends for the bulk of HAL’s businesses, and solid cyclical fundamentals should eventually outweigh the market’s overly bearish perceptions and expectations for North American pressure pumping. HAL has underperformed the OIH index by 10% year/year, under-performing its chief competitor SLB. This is inconsistent with HAL’s strong technology portfolio, growth segments and international footprint. Perception problems about the recent scandals and recent market declines makes this a good point to buy HAL's shares.

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