Company Overview: Halliburton Company (NYSE: HAL) provides products and services, required by the energy players. The business was established in 1919 and was incorporated under the laws of the State of Delaware in 1924. The company has vast experience with proper innovation, collaboration, and execution. Halliburton has rendered a culture of supreme services to the world's major, national and independent oil and gas explorers. The company has a workforce of 55,000 employees from 140 nationalities and across more than 80 countries. The business helps its customers to maximize its asset value throughout the lifecycle of the reservoir - from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion and optimizing production throughout the life of the asset.
 
 

HAL Details
 
Expansion Across International Geographies to Aid Business Growth: Halliburton Company (NYSE: HAL) is one of the leading suppliers of products and services to the energy industry. The company was incorporated in 1919 and currently operates across 80 countries across the globe. The company operates with two segments, namely (i) the Completion and Production segment and (ii) the Drilling and Evaluation segment. Looking at the historical performance over the period of FY17-FY19, the company’s total revenue improved from $20,620 million in FY17 to $22,408 million in FY19. 
 
During FY19, drilling and evaluation activities derived ~37% of the FY19 revenue, up from ~33% in FY18, while completion and production reported the rest ~63% of the revenue as compared to the ~67% in the previous financial year. In FY19, the company optimized performance in North America as the market softened and the international business grew for the second year in a row. Company’s financial position was marked by decent free cash flows amounting to $900 million, demonstrating its ability to generate consistent free cash flow throughout different business environments. With Increased activity, disciplined capital allocation, pricing improvements, ability to compete for a larger share of high-margin services and other factors, the company expects the international growth to be continued in 2020.
 
The company aims to strengthen its product service lines with focus on organic growth, investment and selective acquisitions. The company intends to continue executing certain strategies in 2020 to achieve the growth which include, prudently allocating capital into strategic markets around the world, business collaboration to maximize asset value, and investment in technologies, etc. Additionally, the company is consistently working to increase operational efficiencies to improve the productivity, cost reduction, while delivering value to shareholders. Financial flexibility, leveraging on scale and breadth of operations are other aspects upon which the company is focusing.
 

Segment-wise Revenue Bifurcation for FY19 (Source: Company Reports)
 

Financial Performance Summary for FY17-FY19 (Source: Company Reports)
 
FY19 Business Highlights for the Period ended 31st December 2019: HAL announced its full-year results, wherein the company reported total revenue of $22.4 billion, down 7%, from FY18. On an adjusted basis, the company reported operating income of $2.1 billion, compared to adjusted operating income of $2.7 billion in the previous financial year.Free cash flow, during the period, stood at $900 million, exhibiting the ability of the business to generate consistent free cash flow throughout different business situations. The business witnessed solid top-line growth within the international market aided by expanding the international rig count for the second year in a row. The business reported considerable growth across all the international geographies like America and Europe, with meaningful contributions from both divisions. The Completion and Production division reported a 13% increase in revenue aided by improved activity in mature fields within Europe and unconventional in Argentina coupled with enhanced activities from the United Arab Emirates, and Australia. International revenues from the Drilling and Evaluation division grew by 8% with increased activity levels in all markets, majorly in Norway, Mexico, China and Nigeria. The America region reported an 18% decline in the revenue due to the decline in Customer activity within the region. The business reported a net loss of $1,129 million in FY19, as compared to a profit of $1,657 million due to the inclusion of impairment and other charges of $2,506 million.


Key Income Statement highlights for FY19 (Source: Company Reports)
 
The business derived 53% of its FY19 total revenue from North America, a decline of 60% from FY18. The Middle East, Europe/Africa/Asia and Latin America represented 22%, 15% and 10% of the FY19 total revenue, respectively.

 
FY19 Revenue Break-up as per Geography (Source: Company Reports)
 
Q4FY19 Operating Highlights: Revenue from the Drilling and Evaluation stood at $2.1 billion, up 4% on q-o-q basis, driven by enhanced activity across all product and in Middle East & Asia, coupled with growth in the drilling activity in Europe, Africa, CIS and year-end software sales across the globe. However, these positive performances were moderately offset by lower operational activity in various product service lines within North America, followed by a decline in the testing activity in Latin America. The business derived an income of $3.1 billion from its Completion and Production segment, depicting a de-growth of 13% on q-o-q basis. The segment reported operating income of $59 million, up 13% on q-o-q basis, driven by reduced activity and pricing across its multiple product lines within North America, mainly within stimulation services. Stimulation services across the Middle East stood lower during the quarter. However, increased pressure pumping activity in the Eastern Hemisphere coupled with improved year-end execution of global tool sales partially offset the negatives.
 

Key Q4FY19 Income Statement Highlights (Source: Company Reports)
 

Snapshot of Q4FY19 Operations (Source: Company Reports)
 
Risks: The business might face challenges due to several factors like distressed political scenarios, acts of terrorism, civil unrest, force majeure, inflation, changes in foreign currency exchange rates, etc., across several geographies. Due to the strong US currency in the recent past, the business might witness lower realizations from foreign currencies which might impact the revenue. However, the company believes that the geographic diversification of the business is likely to mitigate the risk as the operations are not constrained to a particular country. Due to its scope of operations, the business is likely to be impacted due to the decline in the operations located within the US territory. Within the North America segment, the market witnessed long-awaited attrition of equipment while as per the recent projections, equipment segment is expected to exit the market in 2020, driven by lower demand and increasing service intensity. 
 
Competition: The company competes with the largest diversified energy services businesses across the globe. The company faces stiff competition due to the service delivery, maintaining safety & environmental standards and practices, retaining workforce, understanding the geological characteristics of the hydrocarbon reservoir, etc. Based on the services and products line and cross numerous geographic lines, the industry is highly competitive in nature and to combat these, the company operates through its own service and sales organizations.

Recent Updates: The company declared the issuance of $1.0 billion aggregate principal amount of 2.92% senior notes due 2030, closed on March 3, 2020, subject to the satisfaction of customary closing conditions. The funds would be used for general corporate purposes, which may include the repayment or repurchase of other indebtedness.
 
Guidance: For FY20, the company anticipates decent growth from its international segment. Within the North America segment, the business continues to strategically grow its non-hydraulic fracturing businesses in North America. Continued implementation of the cost savings and service delivery program will lead the company to achieve higher utilization of existing fleets with a focus on delivering margin expansion and strong returns and cash flow.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 42.74% of the total shareholding. The Vanguard Group, Inc. and Dodge & Cox hold the maximum interests in the company at 10.93% and 5.15%, respectively.
 

Top 10 Shareholders (Source: Thomson Reuters)

Key Metrics: The Company reported decent numbers in FY19, wherein HAL posted EBITDA margin at 16.4%, higher than the industry median of 16%. The company reported Asset Turnover ratio of 0.87, higher than the industry median 0.54. Cash cycle days stood at 86.6, marginally higher than the industry median of 86.5. The company reported asset to equity of 3.17x in FY19, as compared to the previous financial year’s 2.73x and the industry median of 1.90x. Long term debt to capital stood robust at 56.5%, higher than the previous financial year and industry median of 51.9% and 20.8%, respectively.


Key Metrics (Source: Thomson Reuters)

 
Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: P/CF Based Valuation

P/CF Based Valuation (Source: Thomson Reuters)  
 
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation: The stock of HAL closed at $15.39 with a market capitalization of $13.54 billion. The stock made a 52-week low and high of $15.71 and $32.30 and is currently trading at the lower band of its 52-week’s trading range. The stock has corrected by ~27.37% and ~49.19% in the last nine months and one year, respectively. The business expects increased operating activity with strict capital allocation, pricing improvements, and the company’s ability to increase its high-margin services would lead to an improvement in margins for its international segment. Considering the aforesaid facts, current trading levels, business prospects, etc., we have valued the stock using Price to Cash flow based relative valuation method. For this, we have considered peers like Schlumberger NV (NYSE: SLB), National Oilwell Varco Inc (NYSE: NOV), Helmerich and Payne Inc (NYSE: HP), etc., and arrived at a target price which is offering a lower double-digit upside (in % terms). Hence, we give a ‘Buy’ recommendation on the stock at the closing price of $15.39, down 3.51% as on 4^th March 2020.


HAL Daily Technical Chart (Source: Thomson Reuters)

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