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On Jan 16, 2014, we retained our Neutral recommendation on the Houston, TX-based oilfield services behemoth Halliburton Co. (HAL - Analyst Report). Our investment thesis is supported by a Zacks Rank #3 (Hold).

Why the Reiteration?

The company has been benefiting from higher activity in the international markets, which has more than made up for sluggish North American operations. In fact, Halliburton expects the strong demand trend for its services in international markets to continue in the coming years. Halliburton’s inexpensive valuation and a favorable DOJ verdict over the company’s role in the Macondo oil spill lend additional support.

Nevertheless, the increased pricing pressure in its North American operations, oversupply in the pressure pumping business and a sharp run-up in its stock price keeps us on the sidelines.  

Detailed Analysis

Halliburton – set to release its fourth quarter results on Jan 21 – is among the top three players in each of its product/service categories, and is present in all major hydrocarbon-producing regions of the world. The company, which has surpassed earnings estimates in each of the last 4 quarters, enjoys very strong relationships with both publicly-traded and national oil companies worldwide. In particular, the sluggishness in

Halliburton’s international operations continue to reflect strong demand for its services on the back of higher activity. This is expected to be a key growth driver going forward with pricing in the region remaining competitive. We have identified Latin America – offering enough shale development opportunities – as the important market in this regard. Additionally, despite certain issues in Halliburton’s core U.S. segment, the long-term prospects for the business remain robust.

In September, Halliburton got reprieve from the United States Department of Justice (DOJ), when it closed its investigation into the company’s role in the Gulf of Mexico’s Macondo well disaster. We believe that the judge’s acceptance of Halliburton’s guilty plea removes an overhang from the oilfield service provider’s future.

Finally, Halliburton’s positive ‘Analyst Day’ update, together with the recent increase in its quarterly dividend are other pieces of bullish news. While the Analyst Day conveyed the world's second-largest oilfield services firm after Schlumberger Ltd.’s (SLB - Analyst Report) intentions to outgrow the deepwater market by 25% over the next 3 years, the payout hike highlights Halliburton’s commitment to create value for shareholders.

However, we expect the pressure pumping market – in which Halliburton is the leader – to remain oversupplied till the second half of 2014. This is likely to exert pressure on the company’s sales. Moreover, given the massive run-up in the stock (1-year gain of almost 40%), we advise investors to proceed with caution.

Stocks That Warrant a Look

While we expect Halliburton to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at Emerge Energy Services L.P. (EMES - Snapshot Report) and Helix Energy Solutions Group Inc. (HLX - Snapshot Report) as good buying opportunities. Both these U.S. oilfield service providers – sporting a Zacks Rank #2 (Buy) – have recorded solid growth and have the potential to rise from the current levels.

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