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The Management Lowdown: Halliburton in 2016

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What does Halliburton’s CEO think?

Halliburton’s (HAL) management expects energy market challenges to persist in 2016. In the fiscal 4Q15 press release, Halliburton Chairman and Chief Executive Officer Dave Lesar stated that “2016 is expected to be another challenging year for the industry,” adding that the company believes its customers will “remain focused on cost per barrel optimization and gaining higher levels of efficiency, both of which bode very well for Halliburton.”

Lesar also stated that “when this market recovers we believe North America will respond the quickest and offer the greatest upside, and that Halliburton will be positioned to outperform.”

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Halliburton’s North American cost structure

Halliburton’s management is wary of higher costs of operations in North America, particularly when sales are falling there. In North America, HAL’s operating income dipped 95% in fiscal 4Q15 compared to one year previously. Regarding this, Lesar made clear in the company’s fiscal 4Q15 press release that HAL’s “margins continue to include an elevated cost structure in North America, in anticipation of the pending Baker Hughes acquisition.”

Halliburton’s estimates the following for fiscal 1Q16:

  • eastern hemisphere (including Asia and Africa) revenues to decline sequentially by a low double-digit percentage
  • Latin America revenues to decline sequentially by a mid-teens percentage
  • North America revenue to decline with the rig count fall

Analyst targets for Halliburton

While the lowest analyst target price for Halliburton is $32, the highest is $70. The median target price, surveyed among the sell-side analysts, for HAL is $40.2. Halliburton is currently trading near $36.1, implying an 11% upside at its median price.

By comparison, Oil States International (OIS) received a $29 median target price. Relative to its current price of ~$30, this implies a ~1% downside. HAL makes up 2.3% of the Vanguard Energy ETF (VDE). If you’re looking for exposure to oil and gas equipment and services, VDE has 15.8% exposure to the industry.

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