Why We're Increasing Halliburton's Moat to Narrow
We think Halliburton represents an attractive opportunity at today's levels.
We think Halliburton (HAL) represents a fairly attractive opportunity at today's levels, as it is one of the cheapest companies in our oil services universe. The company has performed extremely well during the 2008-09 downturn and subsequent recovery, and we think its 2011 prospects look bright, as its end-stage markets continue to improve. In addition, we believe the recent industry consolidation as well as the company's drilling solutions has earned it a narrow moat. More quantitative metrics also support Halliburton's moat, as over the past few years the firm has delivered returns on invested capital well in excess of its cost of capital, and we expect this value creation to persist going forward. In this article, we share the detailed reasoning behind our decision to increase Halliburton's moat to narrow.
Historically, we've been reluctant to award moats to the services players outside of Schlumberger (SLB), as sustainable pricing power has been elusive, due to the industry's volatility. That said, with the industry consolidation that has taken place over the past year with the Schlumberger/Smith and Baker Hughes (BHI)/BJ Services deals, we think the industry's long-term pricing power has strengthened. Halliburton has also used the 2008-09 downturn to take out many smaller competitors by setting prices below their cash break-even costs. The aggressive moves during the downturn positioned Halliburton to turn in industry-leading performance in North America as the market recovered in 2010.
Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.