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Why Halliburton Is a Better Stock than Schlumberger for 2018

Among the major oilfield services firms, Schlumberger Limited (SLB) and Halliburton Company (HAL) deserve a special mention, given their massive market caps of $86.4 billion and $38.8 billion, respectively. These companies dominate and define the industry to which they belong to.

Both of these firms have interesting earnings surprise histories. Halliburton surpassed the Zacks Consensus Estimate for earnings in each of the prior four quarters with an average positive earnings surprise of 41.2%. However, Schlumberger beat the Zacks Consensus Estimate for earnings in only one of the last four quarters and came up with an average positive earnings surprise of 4.2%.

Given that West Texas Intermediate crude recently traded at $60 per barrel– the highest mark since Jun 25, 2015 – we can say the business environment is highly favorable for oilfield services players. The latest rig count report by Houston-based Baker Hughes (BHGE) clearly shows that the number of rigs exploring for oil and gas in the United States has increased from 665 to 931, year to date. Ramping up drilling activities should call for more oilfield service contracts. 

Although both the stocks are attractive picks for investors based on their earnings reports and favorable business scenario, our research shows Halliburton is a better choice than Schlumberger for 2018. 

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The Analysis

We have employed three parameters for an in-depth comparative analysis.

Positive Earnings Estimate Revisions

Earnings estimate revisions are at the heart of the Zacks investment philosophy. Stocks that have recently had their estimates revised upward by analysts tend to outperform the market in the next 9-12 months.

In the last 60 days, the Zacks Consensus Estimate for Halliburton’s 2018 earnings has risen from $2.11 per share to $2.16 per share. Moreover, for 2018, we expect the company to report year-over-year earnings growth of 86.5%.

However, the story is different for Schlumberger. The Zacks Consensus Estimate for 2018 has been revised downward, from earnings per share of $2.25 to $2.14 in the last 60 days. Also, for 2018, we anticipate the company to witness year-over-year earnings growth of 46%.

Strong Potential to Generate Cash Flow

Investors often look for indicators that help them determine the ability of a company to generate free cash flow from investments. For this purpose, we have employed the free cash flow yield ratio. Companies with strong operations generally have high free cash flow yield.

Our proprietary model shows that free cash flow yield for Halliburton is 3.7%, higher than 3.5% for Schlumberger.  

Sufficient Funds to Meet Capital Expenditure

A company’s free cash flow is calculated after deducting capital spending from operating cash flow. In the last four quarters, free cash flow for Halliburton came in at $1.566 billion, indicating that the firm has sufficient cash flow to fund capital spending.

In other words, Halliburton generated $2.516 billion in net cash from core operations, while its capital spending amounted to $950 million. Most importantly, its trailing twelve-month free cash flow for 2017 has turned positive from negative free cash flow of $2.279 billion in 2016, reflecting massive improvement in the company’s operations. 

Although Schlumberger’s free cash flow of $3.289 billion is higher than that of Halliburton, it has been decreasing steadily since 2015. If the trend continues, Schlumberger’s reliance on debt capital for financing future operations will increase.

Conclusion

Our comparative analysis shows that the returns from investment at Halliburton are higher than Schlumberger. On top of that, earnings estimate revision trends are also in favor of Halliburton.

This is reflected in Halliburton’s Zacks Rank #2 (Buy), which suggests that the stock could outperform the broader U.S. equity market over the next one to three months. Meanwhile, Schlumberger carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Schlumberger N.V. (SLB) : Free Stock Analysis Report
 
Halliburton Company (HAL) : Free Stock Analysis Report
 
Baker Hughes Incorporated (BHGE) : Free Stock Analysis Report
 
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Zacks Investment Research