Halliburton: How Deep Could Oil Slump Cut for Merger-Focused Firm?

There’s been little good to say about earnings prospects in the oil-services industry the past year given the wicked plunge in crude prices. Every stock in the energy sector has suffered at the hands of falling prices and Halliburton Company HAL, due out with Q4 earnings pre-bell on Monday, is no exception.

But HAL has signs of staying power in this challenged industry, say some industry analysts. HAL remains active in the deal space, for instance.

In the last quarter, HAL executives told analysts that the drop in global crude oil prices resulted in “another step down in activity levels throughout Q3, accompanied by further price reductions across the business." Oil field service players primarily support upstream companies that include drilling firms setting up their oil and gas wells. Industry analysts believe another tough period is already on the books for Q4. And yet, generally, HAL keeps moving forward, including with its plans to acquire rival Baker Hughes Incorporated BHI.

Already Priced In?
As the industry continues to slog through excessive global supplies—including contributions from the U.S. and a post-sanction Iran—plus contemplate the risk of weaker demand from China and other growth engines, it can prove challenging to sort through energy-sector earnings for bright spots. Both U.S.-traded and London-traded crude oil futures had pushed below $28 a barrel, their lowest in over a decade, this month and related stock trading has followed suit (figure 1). But stocks have also been recovering on the oil market’s tails. On Friday, hopes for global economic stimulus launched a some 5% recovery in crude futures prices.

Notably, HAL has managed to outpace earnings expectations in five straight quarters. But did Wall Street get it right this time? Analysts reporting to Thomson Reuters are pegging a per-share Q4 profit of $0.24 on revenue of $5.11 billion. That would mark a haircut of 80% from the year-ago quarter’s $1.19 a share. On the revenue line, it’s a 42% drop.

Much of Wall Street could look past the numbers to try to assemble what’s next for this industry. Motley Fool writers plan to listen closely to HAL’s spending plan. “For example, if (HAL) says that it will spend 2016 paying down debt instead of accelerating oil and gas activity, then that would be a sign that there's a lot more downside in earnings yet to come,” they offered.

Volatile Stock
The implied volatility in HAL is elevated, in part because of broad-market volatility. It sits in the 83rd percentile. Short-term option traders are pricing in a potential 5.5% move for the stock price in either direction surrounding this earnings release, according to the TD Ameritrade thinkorswim® platform’s Market Maker Move indicator. Comparable statistics tell us that is a fairly significant move for a stock trading in the $20s.

Option trading heading into next week’s earnings release has been relatively sparse. The most notable action emerged in the weekly 27.5 put options. Call option trading has been mixed and sparse, offering few specific clues on trader expectations for underlying share moves.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

Will Breakfast Save the Day for MCD?
Meanwhile, a Dow Jones Industrial Average ($DJI) component, McDonald’s Corporation MCD, is up for scrutiny when it issues results ahead of Monday’s trading start.

Investors and analysts are curious if a year of management upheaval and menu indecision settled down by Q4 for the fast food chain. One feature, all-day breakfast is seen helping grow per-share profit despite an expected drop in top-line sales, according to industry analysts. For the quarter, the Thomson Reuters earnings forecast sits at $1.23 a share compared with $1.13 in the year-ago period. Revenues are expected to fall back to $6.23 billion compared with $6.57 a year ago.
Same-store sales—a key measure of growth across the retail space—are expected to have advanced what analysts consider a respectable 3.1% globally. In the U.S, which struggled most of 2014, comparable-store sales are expected to rise 2.6% in 2015, which McDonald’s credits to a new buttermilk crispy-chicken sandwich and a return to its original Egg McMuffin recipe, according to the Wall Street Journal.
While other blue-chip stocks are hurting since the beginning of the year with double-digit retreats, MCD shares are off less than 1% (figure 2).
Heading into earnings, implied volatility levels are at a historically high 87th percentile. Short-term option traders are pricing in a potential 5% move for the stock price in either direction surrounding this earnings release, according to the TD Ameritrade thinkorswim® platform’s Market Maker Move indicator. On the call option side, buyers have emerged lately for weekly options at the 121 strike. Put option buyers are in for the 111 weeklies.