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HAL or SLB: Which Oil Stock Looks Better Ahead of Q4 Earnings?

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Kinder Morgan Inc. (KMI - Free Report) reported fourth-quarter results on Jan 17, kicking off the earnings season for the energy space. 

Now, oil service companies — providers of technical products and services to drillers of oil and gas wells — are slated to release October-to-December numbers in the coming weeks. These reports are likely to provide a better understanding of the energy sector’s performance this earnings season. In particular, key oil services earnings reports scheduled for release this week and the next are that of Schlumberger Ltd. (SLB - Free Report) and Halliburton (HAL - Free Report) .  

The world’s largest oilfield services provider Schlumberger is expected to report on Jan 19, while smaller rival Halliburton will post its fourth-quarter numbers on Jan 22.

Here, we take a closer look at which of these stocks is better placed, although both carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Analysis

We have assessed the stocks on six parameters.

Price Performance

During the fourth-quarter 2017, Halliburton clearly outpaced Schlumberger and the industry in terms of price performance. Halliburton rallied 6.2% against the respective 3.4% and 1.9% declines of Schlumberger and the industry.

Free Cash Flow Yields

Companies with strong operations generally have high free cash flow yield, indicating that the amount of money investors are generating is more than the amount spent on the stock.

Our proprietary model shows that free cash flow yield for Halliburton stands at 3.7%, slightly higher than 3.5% of Schlumberger.

Earnings History and ESP 

Halliburton has an incredible history when it comes to beating earnings estimates. The company has consistently surpassed the Zacks Consensus Estimate for earnings since mid-2014. As far as recent history is concerned, the Texas-based firm delivered an earnings beat in each of the trailing four quarters, the average positive earnings surprise being 41.2%. Meanwhile, Schlumberger has managed to beat earnings in one of the last four quarters, the average positive earnings surprise being a modest 4.2%. 

Considering Earnings ESP as well, Halliburton is likely to beat earnings in this upcoming quarter. This is because the stock has the right combination of two key ingredients — an Earnings ESP of +0.46% and a Zacks Rank #3.

The picture is different for Schlumberger as the stock has an Earnings ESP of -1.87%.

Earnings Expectations for 2018

The Zacks Consensus Estimate for Halliburton’s 2018 earnings currently stands at $2.19 per share, representing year-over-year growth of 89.1%.

For Schlumberger, the same is pegged lower at $2.15 per share, reflecting growth of 47.4%.

Valuation

Halliburton and Schlumberger are overvalued when compared to the Zacks Oil & Gas–Field Services industry. For this, we have employed the EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization) ratio, which is often used to value oil and gas stocks, given their significant debt levels and high depreciation and amortization expenses.  

With an EV/EBITDA ratio of 18.37, Halliburton is overvalued compared to the industry’s 10.57, though Schlumberger also looks pricey compared to the industry; its EV/EBITDA ratio of 15.98 lends it an advantage over Halliburton.   

Dividend Yield & Debt Burden

Schlumberger’s current dividend yield of 2.6% is significantly higher than 1.4% of Halliburton. Also, over the past year, the dividend yield of Schlumberger has been consistently higher than Halliburton.

Schlumberger has a lower leverage as evident by its debt-to-capital ratio of 28.4% compared with Halliburton’s 55.6%.

Bottom Line

Halliburton clearly scores higher in terms of share price movement, earnings surprise history and free cash flow yield. On top of that, the company has a much higher ESP reading of +0.46% as against Schlumberger’s -1.87%.

However, Schlumberger holds an advantage when it comes to dividend yield and valuation. The stock also has less exposure to debt.

Overall, our comparative analysis shows that Halliburton has an edge over Schlumberger on most of the parameters.

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Schlumberger Limited (SLB) - free report >>

Halliburton Company (HAL) - free report >>

Kinder Morgan, Inc. (KMI) - free report >>