Halliburton Stock, Baker Hughes And SLB Plan Return 50% (Or More) To Investors

Halliburton stock and its peers lagged the rallying stock market, even as fourth-quarter earnings from the oilfield services and equipment leaders provided fresh details on what propelled a 52% rebound in oilfield service stocks since September. In addition, the group delivered unanimously rosy outlooks for the year, despite projections for lower oil prices in both 2023 and 2024.

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Halliburton (HAL), Baker Hughes (BKR) and SLB (SLB), formerly known as Schlumberger, all project strong oil demand and tight supplies for the foreseeable future. Each oilfield services leader also pointed to myriad international growth opportunities, especially in the Middle East.

As a result, SLB expects to distribute more than 50% of its free cash flow, totaling $2 billion, to shareholders in 2023. Halliburton also announced plans to return at least 50% of its free cash flow to investors through dividends and buybacks. Meanwhile, Baker Hughes says shareholders can expect it to return 60%-80%.

“It’s clear to me that oil and gas is in short supply and only multiple years of increased investment in both stemming declines and reserve additions will solve short supply,” Halliburton CEO Jeff Miller said during the company’s conference call. “I believe these investments will drive demand for oil field services for the next several years.”

SLB, Halliburton Stock Big Cap 20 Names

Halliburton stock bounced around 70% from a September low through Thursday’s session. SLB shares gained 61%. Baker Hughes rallied 55%.

As the market rolls into February, oil- and gas-related stocks have turned hit or miss. Energy stocks were volatile throughout 2022, but ran easily ahead of the overall market. The 31 stocks in the Oil and Gas Field Services collectively advance 48% for the year, despite spending most of the year in a consolidation.

Heading into 2023, the natural gas supply/demand scenario has turned more bearish — with U.S. natural gas prices down more than 60% over the past seven weeks. Oil markets remain more bullish, although U.S. oil prices have logged three straight monthly declines.

Still, a number of oil and gas related stocks find themselves on IBD lists of leading growth stocks, including the IBD 50, Big Cap 20 and Sector Leaders lists.

Energy giant Exxon Mobil (XOM), reported fourth-quarter earnings on Tuesday, and is attempting to break out from a flat base with a 114.76 buy point. Chevron (CVX), which reported record profit and a $75 billion share buyback on Jan. 27, has broken down sharply, nixing a base-building effort. Valero Energy (VLO) has also broken down out of a base, while Matador Resources (MTDR) is shaping a down-trending handle on a 13-week cup.

Oil Drillers

Meanwhile, SLB and Halliburton stock are both holding support and near buy zones coming out of earnings. The Oil&Gas-Machinery/Equipment industry group currently ranks No. 1 out of 197 industries tracked by IBD. In that group, Baker Hughes is hovering around a 31.98 buy point in a nine-week flat base.

Patterson-UTI Energy (PTEN) and Helmerich & Payne (HP), the top suppliers of drilling rigs and related equipment and services to the industry, are also forming bases.

CFRA analyst Jonnathan Handshoe wrote on Jan. 24 that contracts for around 70% of active oil rigs will end by the second half of 2023. This should lead to a busy round of profitable updating in contracts for HP and PTEN, according to Handshoe, a possible demand for additional rigs farther ahead.

“Drilling fundamentals should improve across the board, in our view. While we don’t expect that there will be demand for new builds for rigs in 2023, however, with rigs rolling off contract and will be repriced with term contracts, we wouldn’t be surprised if land drillers started building new rigs to meet the rising demand in 2024,” Handshoe wrote.

Oil And Gas Market And Price Forecasts

The optimistic outlooks from SLB, Halliburton and Baker Hughes follow positive oil demand forecasts from both the International Energy Agency (IEA) and the Organization of Petroleum Exporting Countries (OPEC).

The IEA estimates the recent easing of Covid restrictions in China will boost 2023 global oil demand to record highs. Meanwhile, OPEC Secretary-General Haithan Al-Ghais has said he is “cautiously optimistic” about the outlook for the global economy, as a recovery in oil demand in China is tempered by signs of fragility elsewhere. He also said demand in China could grow 500,000 barrels per day in 2023.

OPEC’s Joint Ministerial Monitoring Committee on Wednesday recommended no change to the group’s current production quota.

Estimates from the Paris, France-based International Energy Agency forecast China’s reopening will drive global oil demand to a record 101.7 million barrels per day (bpd) in 2023, up by 1.9 million bpd from 2022.

The Energy Information Administration (EIA) forecasts crude oil production in the U.S. will average 12.4 million bpd in 2023 and 12.8 million bpd in 2024, surpassing the previous record of 12.3 million bpd set in 2019. In 2022, U.S. crude oil production averaged an estimated 11.9 million bpd.

The EIA is also expecting U.S. crude oil prices to average $77 per barrel in 2023 and $72 per barrel in 2024, down from $95 per barrel in 2022. The Energy Information Administration also forecasts U.S. natural gas prices will average $4.90 per million British thermal units in 2023, more than $1.50 per million British thermal units lower than the 2022 average.

SLB Stock: Oil Demand Optimism

SLB topped fourth-quarter revenue and earnings views on Jan. 20. The company reported EPS grew 73% to 71 cents per share while revenue jumped 27% to $7.9 billion.

Third Bridge analyst Peter McNally said SLB has suffered from a slow international recovery in recent years, “but this may have finally turned the corner.”

And it is noteworthy, McNally added, that SLB’s “digital & integration” business segment exceeded the $1 billion quarterly revenue level for the first time in Q4.

SLB relies on international markets for more than three quarters of company revenues. SLB expects a record level of upstream investment in the Middle East throughout 2023. The company said it already has a combination of oil and gas offshore development plans in place throughout the region.

“Despite concern for potential economic slowdown in certain regions, oil and gas demand growth remains resilient,” SLB CEO Olivier le Peuch told investors during the Q4 earnings.

In 2022, SLB earnings advanced 70% to $2.18 per share. Full-year revenue came in at $28.1 billon, up 23% compared to 2021. This was in-line with company expectations. In 2023, SLB is looking to grow at 15% compared to 2022.

“I really believe that the cycle that we have entered in internationally, that is characterized now by the Middle East joining the growth engine, if you like, is set to be very durable,” le Peuch said.

Halliburton Stock, Oilfield Services: Strong Orders

Morgan Stanley analyst Connor Lynagh says the market generally agrees with SLB’s assessment of oil and gas in 2023, but are less clear on the service industry’s currently inflated prices will play out.

Debates remain regarding “the durability and magnitude of potential service-pricing power,” Lynagh wrote in a recent note. Those questions should begin to clear up by mid-2023, Lynagh says.

Baker Hughes, on Jan. 23, missed fourth-quarter earnings and revenue targets, with revenue growing 8% to $5.9 billion in Q4 Earnings increased 52% to 38 cents per share. However, BKR also painted a bright picture for the 2023 oil market.

The Fed’s New Key Inflation Rate Eased In December; S&P 500 Rises

Third Bridge’s McNally said the most significant data point in Bakers’ report was $8 billion in new orders booked during the quarter.

“This reacceleration after a few quarters of cooler bookings brightens the outlook,” he said.

On Jan. 23, Baker Hughes executives reported a record backlog of $25 billion, aided by increased LNG equipment orders.

In 2022, orders increased 24% to $26.7 billion. Full-year revenue edged up 3% to $21.16 billion— the first advance in three years for the company. Revenue from the company’s oilfield services segment increased 10% compared to 2021. Full-year EPS shot up 43% to 90 cents per share.

Baker Hughes Looks Forward

Baker Hughes forecasts Q1 2023 revenue between $5.3 billion-$5.7 billion and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) between $700 million-$760 million. For 2023, the company expects revenue between $24 billion-$26 billion and adjusted EBITDA between $3.6 billion and $3.8 billion.

Baker Hughes CEO Lorenzo Simonelli said during the Q4 earnings call the global economy is expected to face challenges in 2023. However, the oil and gas outlook remains cheery, based on the industry’s capacity to keep up with rising demand.

“With years of underinvestment now being amplified by recent geopolitical factors, global spare capacity for oil and gas has deteriorated,” Simonelli said. It will likely “require years of investment growth to meet forecast future demand.”

Halliburton Stock: HAL’s Opinion

Halliburton stock continued to test support at its 10-week moving average, after its quarterly report on Tuesday. HAL saw Q4 EPS and revenue increase 100%, to 72 cents and $5.58 billion, respectively. It reported 2022 EPS of $2.15, up 99% compared to 2021. Full-year sales shot up 33% to $20.3 billion.

Analysts expect 2023 earnings growing 40% to $3.02 per share, according to FactSet. Full-year revenue is predicted to increase 16% to $23.6 billion.

CEO Jeff Miller told investors everything points “toward continued oil and gas tightness in 2023.” Miller expects activity in the U.S. to remain strong and service intensity to increase through 2023. The reopening of China’s economy will likely factor strongly into the year’s global demand.

Morgan Stanley’s Lynagh reinforced the view on North American strength.

“We have noticed a high degree of concern about North American activity and service pricing,” Lynagh wrote on Jan. 25. It will probably take continued margin expansion through 2023 to disprove the bear thesis, the analyst noted, said “we are not all that concerned.”

Please follow Kit Norton on Twitter @KitNorton for more coverage.

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