Halliburton Company: Buy the Dip?

By Matthew DiLallo Markets Fool.com

Halliburton (NYSE: HAL) has stumbled out of the gate in 2017, falling about 8% since the start of the year. That dip came after a sharp rally over the last year, with the stock surging more than 65% at one point. While shares are still up nearly 42% over the past year, the recent oil price-inspired sell-off certainly raises the question of whether it's time to buy this dip.

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A series of disappointments

Halliburton hasn't given investors much to cheer about this year. In mid-January, the company disappointed investors with its lackluster fourth-quarter results. While it beat the consensus estimate for earnings, it missed on revenue. It also warned that business activities in international markets had yet to turn the corner, which was something rival Schlumberger (NYSE: SLB)pointed out. Meanwhile, Halliburton said that it planned to raise prices this year, though it would need to sacrifice market share for margin improvement.

Image source: Getty Images.

Furthermore, Halliburton just last week warned that its first-quarter earnings would likely miss expectations due to higher costs and continued market weakness outside North America. It appears that the company will whiff on the analyst consensus by quite a bit since it anticipates earnings per share to be in the low single digits while analysts had been expecting earnings of $0.13 per share.

Finally, there have been several reports that the company is close to a deal to buy Norwegian oil services company Aker Solutions or its subsea unit. Analysts seem to like the combination because it would give Halliburton a product suite that rivals both Schlumberger and the soon-to-be-combined oil and gas division of General Electric (NYSE: GE) withBaker Hughes(NYSE: BHI). That's because Aker would provide Halliburton with a subsea product offering, though that business is already part of a joint venture with Baker Hughes. Investors, however,aren't so sure this deal is a good idea because of the cost issues that plague the offshore drilling space. As a result of those higher costs, many offshore drillers don't expect business conditionsto turn around for at least another year, if not more. In fact, the CEO of GE's oil and gas business recently said that the company doesn't anticipate a rebound in activity until 2018 or 2019.

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Image source: Getty Images.

The double-edged sword

While all those disappointments have weighed on the stock, what has affected it the most is the recent slump in crude prices. After running up for much of the past year, and rising to the low $50s, crude went lower a few weeks ago and has now fallen to the upper $40s. Fueling that sell-off has been the rapid increase in U.S. oil production as producers are ramping up drilling and completion activities. That work has been a boon for Halliburton, which anticipates that its revenue in North America will rise 25% in the first quarter versus the fourth.

However, with oil supplies piling up as a result of this activity increase -- and despite OPEC's best efforts to drain the glut -- it's causing oil prices to fall below the comfort level of shale producers. Because of that, there is a growing concern that shale drillers will need to slow down activities so that they don't make matters any worse -- especially considering that they're relying on OPEC's good graces and need the oil cartel to extend its output cuts so that supplies don't keep piling up. That said, if shale drillers start tapping the brakes, it could have a significant impact on Halliburton because shale is such an important business driver for the company.

Investor takeaway

The industry appears to have ramped up drilling activitiestoo quickly. As a result, crude prices seem to be on shakier ground than the industry had hoped. That is having several impacts on Halliburton, including increasing its costs while clouding its outlook because there's a growing possibility that shale drillers might need to pull back on spending if crude continues to slide. Because of that, there could be more downside ahead for the oil-field service giant. Now, therefore, might not be the best time to buy the dip because there could be an even bigger drop up ahead, especially if crude tumbles down to the low $40s.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of General Electric. The Motley Fool has a disclosure policy.