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Halliburton stock could see upside from the company returning increased free cash flow to investors. (douglasmack/shutterstock)
Halliburton (HAL) will likely return more cash to shareholders this year, a Morgan Stanley note projected on Tuesday. HAL stock rose in early trading.
Morgan Stanley’s Connor Lynagh upgraded oilfield services giant Halliburton to overweight from equal weight on Tuesday. The analyst increased his price target on the Houston-based company to from 28 to 30. That is about 20% above where shares traded on Tuesday morning.
Lynagh wrote that the market underestimates the company’s the company’s restrained spending and its free cash flow. Like many companies in the oil and natural gas industry, Halliburton has sharply reduced its normal capital expenditures and operational spending.
Investors are increasingly convinced that companies plan to return a large portion of their unspent capital to investors via dividends and share buybacks. However, despite Halliburton’s commitment to increasing free cash flow,” in our investor conversations,” Lynagh wrote, “HAL is frequently less-preferred vs. other large service & equipment players,” namely Schlumberger (SLB) and Baker Hughes (BKR).
That could begin to turn around later this month, when Halliburton reports fourth-quarter results on Jan. 24. Lynagh expects the company to announce plans to redirect capital in ways that he says would “represent a meaningful catalyst” for Halliburton stock.
Lynagh claims to be more bullish on North American production markets than Wall Street overall. This leads to free cash flow estimates about 20% above consensus for 2022. The analyst forecasts free cash flow of $994 million for 2021, rising 63%, to $1.64 billion, for 2022. The 2022 estimate is more than 40% above the company’s pre-pandemic free-cash-flow level in 2019.
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The upgrade is important because energy stocks in general face an uphill climb in 2022. Energy stocks rallied as U.S. oil prices recovered 55% in 2021. Barron’s reports that energy stocks in the S&P Composite1500 rose 49%, large, diversified oil companies rose 45% and oil producers rose 86%.
Oil prices are now trading near their high levels in seven years. That means stock price gains are more likely to be tied to earnings increases or shareholder compensation.
Halliburton’s upgrade plays into that strategy among both producers and vendors. In addition, Halliburton has not pushed as hard as peers to emphasize what Lynagh calls its “digital earnings power” — the company’s prowess in virtual oilfield analytics allowing producers to more efficiently target and extract resources.
The same is true in Halliburton’s handling of its energy transition story. That’s the small but growing piece of the business directed toward carbon capture technologies, geothermal projects, well abandonment solutions and laboratory services.
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Still, the industry projects a significant, though possibly wobbly, uptrend.
“I see a multiyear upcycle unfolding,” CEO Jeff Miller said in Halliburton’s Q3 release. “Structural global commodity tightness drives increased demand for our services, both internationally and in North America.”
U.S. oil production has lagged its typical boom-level rise alongside the recovery in oil prices, as oilfield players cautiously tend to their balance sheets. But output has picked up in the U.S. after dropping off during the start of the Covid-19 pandemic as employees return to the office and demand for air travel increases.
The U.S. Energy Information Administration said that output from the Permian basin in West Texas and New Mexico, the largest U.S. production area, was on track to top its pre-pandemic record levels in December.
Halliburton shares jumped 7.3% to 25.74 against mixed overall trade on the stock market today. That put Hal stock within 4% of a 26.85 buy point in a cup base. Halliburton shares gained 21% in 2021, spending the bulk of the year in looping consolidations.
Halliburton holds a 66 Composite Rating out of a best-possible 99. The Composite Rating compiles scores on key fundamental and technical metrics: earnings and sales growth, profit margins, return on equity, and relative price performance. Investors should generally focus on stocks with a Composite Rating of 90 or higher.
IBD ranks Halliburton stock second, tied with Schlumberger, in the oilfield services group.
Halliburton will announce Q4 results before the market opens on Jan. 24. FactSet analysts see the oilfield service provider’s earnings soaring 89% to 34 cents per share with revenue up 26% to $4.07 billion.
Follow Gillian Rich on Twitter for energy news and more.
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1/03/2022 A Relative Strength Rating upgrade for Halliburton shows improving technical performance. Will it continue?
1/03/2022 A Relative Strength Rating upgrade for Halliburton shows improving technical…
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