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Returns from Baker Hughes Are on Par with Halliburton

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Halliburton’s stock market performance

Halliburton Company (HAL) is set to announce its 3Q15 earnings on October 19, 2015. Since January 1, Halliburton has outperformed the oilfield equipment service (or OFS) industry. Year-to-date, investors’ returns from owning Halliburton stock are -3%.

Year-to-date, the VanEck Vectors Oil Services ETF (OIH) has returned -17%. Halliburton accounts for 13.8% of the VanEck Vectors Oil Services ETF.

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Halliburton’s performance relative to its peer

Since the beginning of the year, Baker Hughes (BHI), Halliburton’s oilfield services and equipment (or OFS) industry peer, has performed at par with its larger market capitalization peer Halliburton. Year-to-date, returns from Baker Hughes were a negative ~2%.

On November 17, 2014, Baker Hughes and Halliburton signed a definitive merger agreement under which Halliburton would acquire Baker Hughes’s outstanding shares. For more information, read Market Realist’s article Baker Hughes-Halliburton: A critical deal for the oil industry.

Why energy stocks’ returns have been low

Most energy stocks have tumbled since June 2014, when the price of crude oil started to crash. This negatively affected oil producers’ revenues and margins. Many upstream energy companies cut expansion investments.

According to the EIA’s (U.S. Energy Information Administration) report published on September 24, 2015, US upstream companies’ investment spending increased from $56 billion to $158 billion from 2003 to 2014. However, low crude oil prices since June last year are expected to initiate lower annual oil and natural gas investment over the 2015–2020 period.

In addition, year-to-date, approximately 54% of US rigs have been idled. These are negative developments for OFS companies. OFS stocks have reacted sharply to the lower drilling activity, which lowers their revenues and profits. This explains why OIH’s returns have been so poor.

What can change this underperformance?

If energy prices start rising, OFS stocks may start to look up again as upstream companies drill more. In the past three months, the rig count fall has considerably slowed. From July to September, only 3% of US rigs have gone offline, hinting at stabilization.

Crude oil’s price, however, has remained weak, decreasing another 19% by September’s end compared to the first week of July. OFS companies’ performances will start improving once again only when there is drilling activity turnaround for a sustained period.

Read the next section for Halliburton’s 3Q15 revenue estimates. Read Market Realist’s report on Schlumberger’s 3Q15 earnings estimates in What to Expect from Schlumberger’s 3Q15 Earnings on October 15.

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