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We initiated coverage on Halliburton with an Overweight recommendation and a price target of $55 per share.

Halliburton issued results for Q2 2018, which were below market expectations. This was mainly due to;

  • Price pressure – This is coming from increased competition. However, management said it has plenty of levers to push margins higher in the near-term, but it would come at the expense of the longer term. In other words, it could push pricing, but would come at the detriment of utilization;
  • Higher costs – These are due to maintenance costs. However, the company will benefit from in the years ahead;
  • Permit limits in the Permian Basin – which are creating a bottleneck for companies looking at increasing production. Oil production can expand only as quickly as infrastructure can keep up. And it is struggling to keep up. It's not just crude oil pipelines that are an issue. Along with oil comes associated natural gas and in some cases, producers have no outlet for this gas, so they flare it. But there are various legal limits to flaring. The reality is that there are producers who are having to reduce production because they are bumping up against their permitted limits for flaring.

Despite these short term hurdles, management are of the view that targets will be met in 2019. Next year is projected to be a very good year for Haliburton as Permian constraints are expected to be balanced by a more encouraging international spending outlook. Management are of the view that op-line can grow double-digits internationally next year.

Also, from a cash-flow perspective, Halliburton posted a surprisingly strong free cash flow number this quarter ($391 million), a level which it believes can be maintained through the rest of the year allowing the company to retire debt and authorize additional share buybacks

Valuation

Our 12-month price target of $55 is calculated using a discount rate of 9% and a forward Price-to-earnings multiple of 24x.

Financials

Revenues: we expect revenues to increase by 20%, 10% and 8% in 2018, 2019 and 2020 respectively. These figures are in line with consensus.

EBIT margins: we are forecasting EBIT margins of 11.80%, 12.80% and 12.80% in 2018, 2019 and 2020. Thus shows an improvement in performance of the Group, which continues gaining positive momentum in 2019 when the Group is expected to perform best.

Earnings per Share: we are forecasting an EPS figure of $2.02, $2.47, $2.62 for 2018, 2019 and 2020 respectively. Our forecasts are lower than market consensus being $2.26 and $2.91 for 2018 and 2019 respectively. Reason being we are being more prudent given the increased uncertainty of H2 2018 despite continued improvement post 2018.

Guidance:

  • Guided 3Q EPS 15% below consensus – Management said that Q3 2018 EPS will be similar to that of Q2 2018 ($0.58). This is a 15% below what the market was expecting for Q3 2018
  • Increased costs – Part of the guide down is for accelerated maintenance to repair and upgrade equipment
  • Bullish on 2019 – Though some slack in the system over the next couple of quarters, 2019 is expected to be a very good year for the company.
  • Protecting market share – Management said it has plenty of levers to push margins higher in the near-term, but it would come at the expense of the longer term. In other words, it could push pricing, but would come at the detriment of utilization.
  • International Growth – Growth internationally could be up double-digits in 2019. HAL seemed to side with BHGE, seeing an uneven international recovery, nevertheless is optimistic top-line can grow double-digits internationally next year.
  • Strong Free Cash Flow – HAL posted a surprisingly strong FCF number this quarter, a level, which it believes can be maintained through the rest of the year allowing the company to retire debt and authorize additional share buybacks.

About the Company

Halliburton comprises of 14 Product Service Lines operating in 2 divisions:

  • Drilling and Evaluation provides field and reservoir modelling, drilling, evaluation, and precise well-bore placement solutions that enable modelling, measuring, and optimising well construction.
  • Completion and Production delivers cementing, stimulation, well intervention, pressure control, pipeline and process services, and completion services.