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2018 wasn't exactly the best year for Halliburton's (NYSE: HAL) investors. Last year, Halliburton's stock declined close to 45% after a surge in drilling activity was so productive that most producers exhausted their capital spending budgets with a few months left in the calendar year. So on top of the decline in the broader market, Wall Street has been anticipating that its upcoming earnings results will be decidedly weak.
That may be the case. For longer-term-thinking investors, though, a weak quarter or two in an otherwise growing business could represent a buying opportunity. So let's take a look at what could be in store for Halliburton's stock in 2019 and whether this recent price drop provides a chance to make a smart purchase.
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Will producers be as ambitious as management thinks?
On Halliburton's earnings conference call a few months ago, CEO Jeff Miller was incredibly optimistic about his company's prospects for 2019. One of the things he pointed to as evidence for a strong 2019 was higher capital spending plans from North American producers.
Those statements were made several months ago, when oil prices were around $70 per barrel. That may not necessarily be the case anymore, as oil is now closer to $45 per barrel. To be fair, Miller did note that several of the producers he spoke to had strong hedge positions -- futures contracts in place that guarantee price upon delivery -- that should make their earnings look better than what current oil prices indicate. If that is the case, we could see better results from Halliburton. If oil prices remain low for some time, though, producers could fulfill all of those futures contracts and be exposed to current prices. That would likely lead to much lower capital budgets.
Will the services market tighten even further?
A confluence of factors in the oil patch has made it much less profitable for service providers in recent years. The most significant one is that producers, equipment, and services companies have become much more efficient at drilling and fracking shale wells. The downside to efficiency is that fewer rigs and crews are needed to complete the same number of wells. Lower demand for these things led to an oversupply of equipment and crews that the service industry has been working through ever since the previous oil crash a few years ago.
Halliburton has done its part to alleviate this glut by keeping some equipment idle and not deploying new crews unless it could achieve a certain rate of return. That hasn't been the case with all oil services companies, though. Others that haven't had the size and financial strength of Halliburton have at times taken service jobs at low or even loss-making rates just to keep some revenue coming in the door. As a result, margins and returns haven't been great for the entire industry.