3 Reasons Halliburton Company Stock Could Fall
Throughout the decades, Halliburton Company has made headlines almost as much as it has made money. Whether it's political allegations or the BP oil spill, Halliburton has had more than its share of controversies, but none of it has failed to stop the company from hitting new all-time highs as recently as July. But does that necessarily mean the company will always be a success? Here are three concerns that could leave Halliburton in deep water.
Concern 1: Growing pains
In a September presentation, CFO Mark McCollum mentioned a "downside" to the company's growth. As an example, he cited that a year ago it took 20 rail cars to do one job, and now it takes 75 rail cars.
He further mentioned without going into detail that Halliburton has "some logistics challenges" related to its increased demand. It's a great problem to have, but there is no guarantee that the company will be successful in managing the challenges economically.
Another example he cited was that various projects in the U.S. have had to be delayed because of insufficient volumes of sand, which leads to higher costs. The higher volumes also have led to a 10% to 15% higher crew size per location.
McCollum added: "Labor costs go up, diesel costs go up, maintenance costs go up and of course depreciation, as well in terms of the jobs that you're doing. So, all of those factors conspire to driving cost up." All of these extra expansion costs are a risk in that the increased costs might not be successfully passed on to customers.
Concern 2: The contract killers
Between 92% and 93% of Halliburton's business is on contract, with 60% to 65% up for renewal through the end of the year. Halliburton's goal is to pass current and future costs on to customers. The goal of its customers, you can be sure, is to avoid any extra costs.
With oil prices floating around a four-year low, you can bet customers are feeling margin pressure and will work that much harder at the negotiation table. If Halliburton fails to be as successful at the negotiation table despite plans otherwise, it will directly lower prices and profit margins.
Remember, when it comes to pricing, all other things being equal, every $1 reduced from the top line is $1 reduced from the pre-tax bottom line.
Concern 3: South of the border
Halliburton is far from being immune to problems in certain geographies, and lately it's been Mexico and Latin America. In the last earnings conference call, CEO Dave Leasr mentioned that in Mexico the rig count was at a 10-year low because of "social disruptions."
Social disruptions? That sounds like a fancy term for heightened security concerns amid cartel-related violence. You've probably heard in the news about the violence and the overall awful situation over the past few years, and it doesn't seem to be getting any better.
Then even further south, Leasr stated, "Turning to Latin America, we faced issues around revenue timing during the quarter ... I am certainly not thrilled with how some of the things played out this quarter."
During the first quarter, operating income for this region fell 9% year over year to about $100 million, which isn't the end of the world, but then for the second quarter it fell 39% year over year and 38% sequentially to $61 million.
While he's confident that things "should" improve for the second half of the year, you can't rule out the possibility that conditions could get worse. Problems cited included various things from software issues to new high-cost projects with minimal revenue.
Management has been confident yet still missed before. For example, Halliburton's executives had mostly great things to say about Latin America back in the April call, including forecasting second-quarter revenue growth to rise by the "high single digits" along with flat profit margins for the region. Instead, the results came in nowhere close on either.
Foolish bottom line
There are plenty of reasons to be bullish on Halliburton, but it's important to understand there are risks as well that could set it back. Higher costs, customers with lower revenue, and continued problems south of the border are very real risks that, taken together, could prove to be setbacks for Halliburton's stock.
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The article 3 Reasons Halliburton Company Stock Could Fall originally appeared on Fool.com.Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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