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Wednesday, August 09, 2006

Halliburton And The Ghost Of The Exxon Valdez

Stocks: (HAL)(SU)

It has been over seven years since the oil tanker Exxon Valdez hit Bligh Reef in Prince William Sound and released several million gallons of crude oil.

When things break, someone gets paid to fix them. The pipeline to Prudhoe Bay is an example. There were fears, which still have not abated, that the pipeline may be shut, at least partially, for several months, interrupting the flow of crude, expecially for the West Coast of the U.S.

A number of oil traders are forecasting that consumption from China and America, potential terrorist acts, and an aging delivery infrastructure could all raise the price of oil to $80 this year and perhaps $100 a barrel in 2007.

The role of infrastructure has been left out of many of these conversations. More evident has been the issue of finding new oil reserves or milking the current ones for whatever they are worth, and at $80 that premium may be a good deal more.

The beneficiary of much of this demand for building and discover falls to companies like Halliburton and Schlumberger. Wall St. was happy with Schlumberger's June quarterly earnings and it rewarded the company's investors handsomely. The company's revenue rose to $4.69 billion and operating income came in at $1.14 billion. The stock staged a rally from the $55 level up to about $65, which is where it trades now.

Halliburton was a different story. The company has decent earnings with $591 million in net up from $393 a year ago, and revenue rose 12% to $5.55 billion. Energy services sales were strong, but sales at the company's Kellogg, Brown and Root unit were not. KBR is Halliburton's construction arm and it is not getting the bang from rising need for oil equipment and exploration services. Halliburton planned an IPO for the unit, but market conditions and poor performance at KBR killed that. But, Halliburton still plans to spin the unit out to shareholders. That would make the parent much more of a pure play in energy.

The market whipped the company's stock for both its modest earnings improvement and the KBR IPO fiasco. The stock was taken down from $36 to $30, and has yet to recover completely.

All of the action in the oil business is moving Halliburton's way. It is just a matter of time before there are more infrastructure problems and oil spills. With higher pricing, oil companies can afford to raise the cost of exploration and drilling. Halliburton trades at $34.38, well below its 52-week high of $41.99, while Schlumberger trades at $66, closer to its 12-month high of $74.74. Schumerger's price to sales ratio is 4.63 according to Yahoo!Finance. Halliburton's figure is 1.55. That's a big delta, even accounting for differences in the two company's balance sheets.

Based on trends in the oil industry and the disparity in value between Halliburton and Schlumberger, it is a fair guess that HAL will not stay down for long.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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