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Halliburton shares have been in free fall since antitrust regulators blocked the company’s $ 28 billion merger with rival Baker Hughes (NYSE: BHI) in 2016 because they claimed a combination of the second and third largest players in the market would have hurt consumers.
When the companies scrapped the deal on May 1, 2016, the HAL share had an adjusted closing price of $ 38.26. The same stock recently changed hands to $ 8.21, a 17% discount to the average 52-week price target of $ 10. The HAL stock has fallen nearly 70 percent since the beginning of the year.
A few things have happened since the Halliburton-Baker Hughes affair was scrapped. First, the slate boom that has driven the growth of the oilfield services sector due to hydrofracking earlier in the decade has largely erupted. Halliburton is the best supplier of equipment used in the controversial technology.
Hydrofracking made previously uneconomic oil fields worth exploiting, enabling the United States to surpass Saudi Arabia to become the world’s largest crude producer.
Supply Glut lowers prices
Oil prices have also refueled thanks to a supply equalization. According to the US Energy Information Administration (EIA), prices for the West Texas Intermediate (WTI) Crude 2016 ended at $ 53 per barrel. By 2020, they are expected to average $ 29.34, largely due to the economic contraction caused by the coronavirus pandemic. EIA expects prices to bounce back to $ 41.24 in 2021, but that may be too optimistic as it is unclear how the worst public health crisis in more than a century will play out.
Meanwhile, the oil companies are lowering their exploration and production budgets to the bone. For example, Exxon Mobil (NYSE: XOM) recently announced that it would reduce its investment for 2020 by more than 30% to $ 33 billion. Energy consulting firm Spears & Associates recently predicted a 21% decline in global oilfield equipment sales by 2020 to $ 211 billion, the lowest level since 2005. HAL shares’ fracking revenues will decline to $ 4.1 billion this year, according to the company.
Halliburton’s latest earnings report was better than expected as the gains from its international operations offset its losses at home. That benefit has probably largely evaporated in the weeks since the pandemic began. Demand for crude oil has fallen more than 35% since the start of the pandemic.
Even under the most optimistic scenarios, it takes a while to restart the economy. It’s not like turning on a power switch.
Haliburton’s debt problem
If I set aside the worst health crisis in more than a century, I have other concerns about the HAL stock. First, the company is drowning in red ink. It had $ 10.4 billion in long-term debt at the end of last year and dwarfed its market capitalization of $ 6 billion. That’s never a good sign. Given its financial situation, a reduction in dividends seems likely.
Even if we did not live in our current crazy times, I would still not recommend buying Halliburton or other companies that are dependent on the oil market. It’s just so unstable.
Crude oil prices reversed their previous gains on Monday despite what the media called “unsurpassed” production cuts after traders realized they did not go far enough. Finding the right supply / demand will be difficult.
Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He is happier with his investments than his beloved but still underperforming Philadelphia teams. At the time of writing, he had no position in any of the above-mentioned securities.