Off the cusp of several challenging years, Halliburton Company HAL has a more straightforward path to better returns and dividend growth, Goldman Sachs said in a stock upgrade.
The Halliburton Analyst: Neil Mehta upgraded Halliburton from Neutral to Buy and maintained a $26 price target.
The Halliburton Takeaways: Halliburton has lagged behind the SPDR Select Energy Sector XLE ETF by 27%, said Mehta in a Tuesday note.
This underperformance was due primarily to weak returns on capital employed, oversupply in oil markets and a 2020 dividend cut, said the analyst.
During its second-quarter earnings call, the company guided margin expansion of 400 bps by 2023, far exceeding consensus expectations, he said.
The earnings call explained that tighter service markets will lead to continued North American price increases, with international to follow through 2022, Mehta said.
The final takeaway from the earnings call was the double-digit annual growth in upstream international spending and North American oil and gas exploration and production spending, said the analyst.
Each of these earnings takeaways points to increased operating leverage, margins and EBITDA, he said.
Taking a look at its drilling and evaluation (DE) business, Halliburton’s investment in technological innovation for its products and its international growth should help to expand its DE business margins, said the Goldman analyst.
Regarding the completion and production business, the company noted that service pricing increases in North America and a healthier landscape for U.S. pressure pumping following the pandemic will drive “significant margin expansion,” said Mehta. Additionally, continued investment in expanding the company's artificial lift and chemical business lines will support margin-accretive growth globally, said the analyst.
HAL Price Action: Halliburton was up 3.49% at $20.77 at the close Wednesday.
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