Description

HAL:

Summary

Halliburton (HAL) is available at what should turn out to be a very attractive price due to current concerns about commodity prices, North American rig counts, trailing margins and even possible spillover from the BP-Macondo liability trial.  I think these concerns will fade or are more than priced in and that HAL is on the verge of demonstrating significant positive earnings leverage and shareholder friendly cost and capital actions.

Thesis

 I think the company will shortly begin to differentiate itself vs. peers.

We think earnings next year could be north of $4.75 vs. current consensus around-$4.  At a discounted 12X that would imply a +40% gain from current levels.   2013 eps should be about $3.25 as HAL recovers from the guar debacle and as the international projects begin to ramp.

Management has been clear that NA margins bottomed at 12.4% in Q4. Getting back to a normal spread on Guar will add back at least 400 bps (they lost 600 peak to trough when they panicked and bought a ton-several actually-at the top)  Cost savings programs and better  utilization have the potential to add another 400 bps combined.  Management believes they can get back to 25% margins in this cycle, but probably need some improvement in nat gas drilling to get that high.  Note: Q1-13 should show the last of the higher cost guar inventory.  The full cost reduction potential may have to wait until the analyst day in Q3/Q4

In Latin America, HAL’s newly won contracts in Brazil will increase utilization and drive margin expansion over the next several years. Startup may hold back margins until ramped in H2-2013.

Other International (Co calls it Eastern Hemisphere) is seeing record project demand at excellent pricing.  This ramp should also produce strong top line growth and expanded margins going forward.

As the company’s mix shifts towards offshore the rev/margin mix should inflect.

Capital Returns: The company recently announced a dividend payout ratio policy of 15-20%. Thus, while only a 1.2% yield today, the significant 2013/2014 earnings ramp should drive equally aggressive dividend increases.
Current buyback authorization is $1.7bln, about 4% of current market cap. This program can expand as capex moderates in 2014 and beyond.

We expect FCF (before divs/buybacks) of about $2 and $3.50-$4 in 2013 and 2014 as margins ramp and capex tapers.

Catalyst