Multinational Oil Services
Whether or not you subscribe to the peak oil theory or not, the geological facts are that the oil reservoirs discovered today are much smaller and more challenging to develop than in the past. Not only are the oil fields deeper or more remote, but they tend to have higher decline rates than the massive oil fields found in the first half of the 1900's. This geological dynamic bodes well for drilling and services companies that do most of the 'downstream' work i.e. drilling, well completions and management, and managing of geological data.
One company that is a global leader especially in the area of well completions is Halliburton (HAL). Yes this is Dick Cheney's former company and I'm sure he still owns shares. This is a multinational company that had revenues of over 22 billion in 2006. They operate in over 70 countries and last year 50% of their revenue came from overseas and the rest was from N.A. They even recently moved their corporate H.Q. to Abu Dhabi. Last year they spun off their construction unit (KBR) that was awarded lucrative contracts in the rebuilding of Iraq after the war - no doubt a political favour from the White House.
Although this is the old oil business, it is anything but an old industrial behemoth. It is a world leader in oil field technology and regularly churns out patents on its intellectual assets. Some of the world's most complex well completions have been performed by Halliburton.
In terms of financials, they have above industry rates of margin, ROE, and growth. Total debt is 0.45 of equity which isn't excessive. HAL compares very well to other industry leaders like Baker Hughes(BHI) and Schlumberger(SLB).
In my personal portfolio, I have a few Cdn. drillers and services companies, but none have the size or international diversification as HAL. I think this would be a good investment to have as our multinational company which derives much of its profits outside the U.S.
In the long term, if the world wants more oil and gas, they're going to have to drill for it.
posted by Des @ 11/19/2007 01:42:00 PM
6 Comments:
Looking at the 5 year charts, there's been some serious run up in HAL, SLB and OIH (oil services ETF). So question 1) Is this the right time to get in or is this a suggestion to buy on weakness over the next few months?
Further, over the past year or so, HAL has stalled while SLB has been leading the OIH higher. If this is a long term bet on oil services, do we need to bet which of SLG or HAL will win?
Question 2) Can we just buy OIH ETF and remove the company specific risk?
What can I say. Yes all the companies mentioned have had a tremendous run. I believe oil and gas is in a long term uptrend and any short term reversal I consider a buying opportunity. As I mentioned in my Ng post, even to maintain current production most oil and gas producers have to drill wells.
In terms of HAL vs. SLB or OIH, any would be OK but there are differences. The top ten holdings of OIH are BHI, RIG, SLB, HAL, GSF, DO, NE, BJS, WFT, NBR. Of these 5 are primarily contract drillers (both on and offshore represented). The other five including the three I mentioned (HAL, SLB, BHI)are more full service and not focused on drilling, although they each have drilling divisions.
In general the price of drillers tends to be more volatile as drilling exploration tends to go in spurts along with the price of oil. Service companies earn revenue that is less lumpy because of contract work for development wells and well servicing that is ongoing for the life of an oilfield.
SLB has been by far the cream of the crop and its valuation never seems to drop. BHI and HAL do seem to pull back now and again.
Well, I'm asking more questions so I must be interested. I hope this Yahoo Competitors link works:
http://finance.yahoo.com/q/co?s=HAL
Compared to BHI and SLB, HAL seems to have lower GM, OM, and Rev Growth. Also, their P/E's are HAL=10, BHI=17.5 and SLB=23, and yet their PEG(fut.est) are all around 1.25-1.28. This tells me SLB is the class of the field and HAL is a bit of a laggard. So if the growth rate for this sector (and each of the companies) increases by say 5%, then SLB with the higher PE will have greater multiple expansion and price appreciation. (you guys can do the math).
Is there any company specific insight that makes HAL more attractive at their current price? Again I don't know this sector well, so I may believe anything you write :)
I agree that HAL has stalled of late and that's what intrigues me.
I don't know of any company specific news other than HAL is known in the industry as having the technology to have completed some of the most complex wells in the history of oil fields.
I would have loved to any of the three even one year ago but being Cdn I bought more into the drillers as Canada doesn't have any company with the size and scope of these.
I suppose there are two ways to look at SLB vs HAL. If you believe in reversion to the mean then going forward whatever ails HAL will be corrected and their valuation maybe adjusted upwards. On the other hand with SLB, if its running on all cylinders recently and if its not possible to continue this streak then its valuation might be readjusted downward.
There's really no predicting the future other than my 'cheapness' bias here. Sometimes you get what you pay for!
One would hope to see higher margins for drilling more complex wells. I cannot help but think we may be buying the dog in a growth in industry. (ie. got the right macro but the wrong stock?)
May I suggest we buy 2 of the 3, say HAL and SLB? I wouldn't mind paying $20 more in commish to diversify just a bit. Plus we can average into this by buying say $2-3K of each several weeks apart. If that's acceptable, I'm ready for a vote.
I really like the idea of investing in oil services. I too believe that oil production is getting more and more difficult and expensive.
I recommend buying both of them, half and half, unless we have some particular info indicating one is better.
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