For Halliburton, It's Drill Or Die

• Halliburton Company (NYSE: HAL) shares are down 7 percent since July 21, after plummeting from above $42.70 to below $33.50 in mid-August.
• Oppenheimer’s James Schumm maintained an Outperform rating on the company, with a price target of $48.
• Although Halliburton’s recovery could take longer, the current weakness in shares creates a buying opportunity, with merger synergies being a potential catalyst, Schumm mentioned.

Analyst James Schumm said that Halliburton remained Oppenheimer’s top pick, with its risk/reward being “very compelling.” He recommended buying the company’s shares on weakness.

Although there is uncertainty around customer spending in 2016, there seem to be growing expectations of North American operating margins bottoming in 1Q16. “The trajectory of the recovery is subject for debate, and we tend to take a more optimistic view based on a more bullish take on crude prices (relative to the forward curve),” Schumm wrote.

Halliburton’s international margins were sequentially flat, despite revenues declining by 4.7 percent. Schumm expects the company’s margins to contract about 30 bps versus, as compared to a decline of about 330 bps in North America.

Completion & Production recorded a 41 percent y/y decline in revenues and an 85 percent decline in EBIT. On the other hand, Drilling & Evaluation revenues declined by merely 27 percent, with an EBIT contraction of only 11 percent y/y.

The EPS estimates for 2015, 2016 and 2017 have been reduced from $1.55 to $1.51, from $1.72 to $1.25 and from $3.16 to $2.65, respectively, to reflect “a more prolonged recovery period.”

In the report Oppenheimer noted, “We think the Street is valuing the company off depressed 2016 earnings, resulting from the trough position in the cycle and the BHI merger.”

Schumm added that by 2017, the entity formed by the merger between Halliburton and Baker Hughes Incorporated (NYSE: BHI) would have cleared most of the duplicate overhead, while the services market in North America is likely to become “more robust and balanced.”

“We believe investors will increasingly value Halliburton on significantly higher 2017 numbers over the coming months, and merger synergies in 2016 will provide additional catalysts for the stock,” Schumm commented.