Most investors will look back fondly at 2014 thanks to the stock market's 12% riseon the year. Energy investors, on the other hand, will remember 2014 as the year the price of oil plunged by nearly 50%, taking most oil stocks down with it. That rapid, unexpected fall ruined what had looked to bean exceptional year for oil-field services companyHalliburton, as this chart shows.
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Halliburton's stock handily outperformed the S&P 500 through midsummer. At one point it was up nearly 50% on the year. However, as oil prices began to roll over, so did Halliburton's stock price. While the announcement of a merger agreement with Baker Hugheshalted the stock's slide for a little while, the enthusiasm quickly evaporated as oil prices continued an unrelenting sell-off.
Why oil prices squeezed Halliburton's stockHalliburton makes its money by helping oil and gas companies drill new oil wells. With the price of oil now in the $50 per barrel range, oil companies are slashing capital expenses, which will impact Halliburton's growth and margins in 2015, and likely beyond.
Halliburton's business also faces being squeezed bycost reductions demanded by oil companies. Several oil producers have said they expect service costs to come down as a result of falling oil prices. The CFO of Breitburn Energy Partners, for example, said this:
These sentiments were echoed by Kinder Morgan COO Steven Kean at a recent conference. He pointed out that there is a correlation between oil prices and service costs:
Ready for another rough rodeoHalliburton knows lower oil prices mean it must reel in its costs so it can pass those savings to its customers. Chief Financial Officer Mark McCollum pointed this out at a conference:
The company is being proactive as oil prices fall. It has experienced the cyclicality of the oil market before and it knows how to survive the rough ride ahead of it.
Investor takeawayLast year started off great for Halliburton investors as the stock surged through the first six months. However, as oil prices turned so did the company's stock price. That being said, the fall in oil prices likely is what made Baker Hughes available, and that deal could pay big dividends down the road for Halliburton. So, while the company is bracing itself for slower growth and lower margins over the near term, it knows how to maneuver through a tough oil market to thrive once normalcy returns.
The article Why Halliburton Companys Stock Dropped 21% in 2014 originally appeared on Fool.com.
Matt DiLallo has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. The Motley Fool recommends BreitBurn Energy Partners, Halliburton, and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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