For Halliburton, It's Now About Getting Back To Business

It might still be a bumpy road for a while, but Halliburton Company HAL is well-positioned to thrive in the long-term following the breakup of its potential Baker Hughes Incorporated BHI merger. According to J.P. Morgan analyst Sean Meakim, now that Halliburton is passed the Baker Hughes distraction, it can get back to focusing on what it does best: execution.

“With the BHI saga over, we expect Halliburton to get back to business as an oil services company that has generated best-in-class returns over the past cycle, holds the pole position in the right market in a recovery (U.S. onshore) and a well-earned reputation for execution,” Meakim explains.

Related Link: Was The Baker Hughes/Halliburton Breakup A Win-Win?

Halliburton’s recently reported Q1 revenue of $4.2 billion on operating EPS of $0.07 both beat J.P. Morgan’s estimates. Meakim now believes that Halliburton will be free to cut additional costs that is has maintained in preparation for the Baker Hughes deal. He estimates that these costs have been a 3-4 percent drag on Halliburton’s margins.

The $3.5 billion breakup fee that Halliburton dished out to Baker Hughes takes the company’s total net debt to $9.3 billion and boosts its net debt/EBITDA to 4.5x. However, J.P. Morgan predicts that Halliburton can become free cash flow positive again as soon as the second half of 2016.

The firm maintains an Overweight rating on Halliburton and calls the stock a “top pick” to play a long-term recovery in oil.

Disclosure: the author is long BHI and HAL.