Analyst Upgrades Halliburton, Says Cost Cuts Will Increase Profitability Of Next Cycle

Oil services stock Halliburton Company HAL rallied on Monday after the company reported a second-quarter earnings beat, and one analyst saw enough to like in Halliburton’s report to upgrade the stock.

The Halliburton Analyst: Bank of America analyst Chase Mulvehill upgraded Halliburton from Neutral to Buy and raised his price target from $14 to $18.

The Halliburton Thesis: Mulvehill said he was most impressed by Halliburton’s increased efficiency that sets the company up for materially better free cash flow conversion throughout the next oil and gas upcycle. In addition, Mulvehill said Halliburton shares have an attractive valuation, and the company is well-positioned to lever its balance sheet.

Hallibirton shares closed Monday’s session up 2.5% following the report.

“We are surprised, however, shares were not up more given HAL’s significant beat and flattish 3Q EBITDA outlook, effectively resetting the earnings power of the company from $1.3bn of permanent cost cuts and structural changes to overall capital intensity,” Mulvehill wrote Tuesday.

Mulvehill is bullish on Halliburton’s digital strategy, which has allowed the company to lower its maintenance costs and permanently reduce its workforce.

Halliburton has about $8 billion in net debt, but Mulvehill is projecting Halliburton will reduce that debt by 25% by the end of 2022. It will also reduce its leverage ratio down to 2x by that time, he said.

What’s Next? Looking ahead, Mulvehill anticipates the North American opportunity in the next oil and gas cycle will be smaller than it has been in the past, but the investments Halliburton has made in digitizing its business and cutting costs will make the coming cycle much more profitable than previous cycles.

Bank of America is projecting Halliburton EPS of 51 cents in 2021, 62 cents in 2021 and $1.22 in 2022.

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