In a Jan. 21 research note, Raymond James analyst Praveen Narra reported that Halliburton Co. (HAL:NYSE) is "well positioned for 2020" after "solid Q4/19 results." North American cost cuts and international revenue growth have gotten the energy company to its current state.
As for its North American business, Halliburton shrank it to its forecasted 2020 activity levels and concentrated on more stable customers, Narra noted. These changes should significantly improve full-year utilization and lead to fewer cost absorption issues. Also, they should boost 2020 margins beyond those generated through the company's cost saving program.
"With guidance of 95% hydraulic horsepower dedicated in Q1/20, we expect Halliburton can focus on higher-return work despite overall pricing softness," Narra commented.
In Raymond James' model on the Houston, Texas-based energy company, its North American revenues in 2020 drop 14% but EBIT margins rise by 40 basis points year over year (YOY). Boosting that EBIT is an expected, $450 million YOY tailwind from reduced fixed costs and lower depreciation, depletion and amortization.
Regarding international growth, Halliburton achieved double digit revenue growth in that business segment in 2019, and it is expected to continue that trend in 2020, albeit at a slower pace, Narra relayed. Raymond James anticipates a 9% YOY revenue slowdown, but even with that, Halliburton's 2020 revenue would still will exceed that of the industry as a whole, which is expected to increase 6%.
Narra highlighted that for Halliburton, "the cost cutting and right sizing of its footprint, along with continued activity increases in international markets, should drive improvements in margins for both international and North America."
Overall, the financial services firm expects Halliburton's EBIT margins to rise in 2020 about 200 basis points to 8.3% due to the company capitalizing on pricing power in specific markets and starting significant projects.
Narra indicated that due to its cost cutting and capital discipline (the budgeted 2020 capex spend is down 20% YOY), Halliburton generated almost $1 billion of free cash flow in 2019 in a weak environment and should do the same in 2020.
Raymond James expects free cash flow this year will reach $1.3 billion for a 6.3% free cash flow yield at today's prices. Most of the increase should result from capex reduction, with only about 10% coming from earnings/working capital. "Additionally, we see upside to this figure on working capital as a potential source of cash on lower inventory requirements," added Narra.
Raymond James has a Buy rating and a $32 per share target price on Halliburton, whose stock is trading today at around $21.63 per share.[NLINSERT]
1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees.
3) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.
Disclosures from Raymond James, Halliburton Company, January 21, 2020
Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The analyst Praveen Narra, primarily responsible for the preparation of this research report, attest to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analystís compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.
RAYMOND JAMES RELATIONSHIP DISCLOSURES
Certain affiliates of the RJ Group expect to receive or intend to seek compensation for investment banking services from all companies under research coverage within the next three months.
Raymond James & Associates, Inc. makes a market in the shares of Halliburton Company.
Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available here.