In a July 22 research note, analyst Praveen Narra reported that Raymond James lowered its target price on Halliburton Co. (HAL:NYSE) to $37 per share from $39 (the current share price is $23.03). The change reflects Raymond James reducing its H2/19 estimates on the energy company by 2% due to current weakened oilfield activity in North America and lower drilling and evaluation (D&E) margins.
Narra highlighted that despite those factors, Halliburton's Q2/19 results were "ahead of expectations on better-than-expected completion and production (C&P) margins."
Further, looking forward, Narra purported that Haliburton should continue generating free cash flow despite today's flat oil prices if it continues cutting costs and potentially reduces capex in 2019. Raymond James expects Halliburton to generate, assuming a higher oil price, free cash flow of around $1 billion and $1.6 billion for 2019 and 2020, or, at today's prices, a yield of 5% and 8%, respectively.
With respect to margins in specific corporate divisions, Narra pointed out that Halliburton likely will not see a rebound in its C&P numbers until 2020. This is because a slowing U.S. North American oilfield typically translates to depressed C&P margins for the company. Another reason is the likely continuing uncertainty in Q4/19 due to seasonality and exhausted budgets.
In contrast, Narra noted, D&E margins are "poised for improvement" because "international markets are expanding with early signs of pricing strength in pockets." That stronger offshore and international activity could offset some of the weakness in North America. Also, as the rigs get working at the company's North Sea and India projects, "this should lead to strong incremental margins," added Narra. For D&E in Q3/19, Raymond James models roughly 65% incrementals and in Q4/19, 11.4% margins.
The financial services firm maintained its Strong Buy rating on Halliburton, wrote Narra, with its "significant upside to a U.S. oilfield recovery in 2020 under our group's bullish oil price environment."
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Disclosures from Raymond James, Halliburton Company, July 22, 2019
ANALYST INFORMATION
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 analysts Praveen Narra and J. Marshall Adkins, 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 analyst’s 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.
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