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Analyst Blog

Nilanjan Choudhury

Halliburton (HAL) Q3 Earnings Preview: Can the Run Continue?

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Major oilfield service provider Halliburton Co. (HAL - Free Report) is set to release its third-quarter 2016 results before the opening bell on Wednesday, Oct 19.

What Investors Need to Know

The company’s stock performance has been pretty exciting lately. Shares are at fresh highs these days, and the stock has recovered nicely from its rough start to 2016 when oil prices fell to a 12-year low.

In fact, Halliburton has run up 14% in the past month thanks to commitments by OPEC and non-OPEC players to slash production targets., but this report will be a test if this trend can continue heading into 2017.

The world's second-largest oilfield services company after Schlumberger Ltd. (SLB - Free Report) also has an incredible history when it comes to beating earnings estimates. Investors should note that Halliburton hasn’t missed earnings estimates since mid-2014, as you can see in the chart below:

HALLIBURTON CO Price and EPS Surprise

HALLIBURTON CO Price and EPS Surprise | HALLIBURTON CO Quote

However, there are some questions for Halliburton too. The company has a terrible industry rank – in the bottom 35% overall – while it has an 'F' for its VGM score.

Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

The oil services companies (like Halliburton) – providers of technical products and services to drillers of oil and gas wells – kicks off what is expected to be another tough earnings season for U.S. energy firms.

With U.S. rig count falling to record levels, oilfield services players have braced themselves for a prolonged period of contraction in drilling activity. Moreover, as the 2016 budget cycle represents a further fall in upstream players’ capital spending, product and service pricing will suffer. This is particularly true for the independent exploration and production firms that dominate the shale plays. Add to this project delays and job cancellations, which are likely to translate into margin contraction. Needless to say, profitability levels will suffer.

Therefore, notwithstanding the nice bump in oil prices, it will take some time for service providers to translate it into earnings gain.

Bottom Line

It is hard to bet against Halliburton when it comes to beating earnings estimates, given the company’s impressive track record. Moreover, the company’s recent share price rally may render it attractive to the eyes of some investors, particularly those that are in the practice of buying securities with strong momentum.

But with onshore service business yet to bottom and a poor industry outlook, it is hard to get excited by Halliburton ahead of the report either. A sequential decline in revenue and operating income reflects the company’s struggles. The failed merger with Baker Hughes Inc. (BHI - Free Report) meanwhile literally burned a hole in Halliburton’s stomach as it had to shell out $3.5 billion in termination fees - one of the highest in U.S. corporate history.   

Earnings Whispers

Our proven model does not conclusively show that Halliburton will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate both stand at a loss of 6 cents.

Zacks Rank: Halliburton has a Zacks Rank #3. Though a Zacks Rank #3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Halliburton, here is one firm from the energy space you may want to consider on the basis of our model, which shows that it has the right combination of elements to post earnings beat this quarter:

CONE Midstream Partners L.P. (CNNX - Free Report) has an Earnings ESP of +2.7% and a Zacks Rank #1. The partnership is likely to release earnings on Nov 4. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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