Halliburton’s stellar Q4 shows strong oil demand can sustain the Club holding through 2023

Oil-field-services firm Halliburton (HAL) reported better-than-expected fourth-quarter results Tuesday, bolstering the Club’s long-term investment case in the energy stock. Total revenue climbed by 30.5% year-over-year, to $5.58 billion, largely in line with analysts’ forecasts. Earnings-per-share (EPS) doubled on an annual basis, to 72 cents a share, ahead of expectations for EPS of 67 cents a share. Bottom line Halliburton served up another strong quarter, with a headline earnings beat , strong margin expansion, solid cash flows and a robust outlook. Even better, the management team doesn’t expect investments in new oil-and-gas projects to wane any time soon. The board authorized management to link a portion of future dividends and buybacks to the company’s free-cash-flow generation. Nonetheless, shares of Halliburton tumbled Tuesday, trading down roughly 2.4%, at $39.59 a share. We don’t view today’s move lower as anything more than profit taking following a very strong year. Given years of material underinvestment in oil-and-gas production in the U.S. and an undersupplied global oil market, management expects demand to sustain the company beyond 2023. The Club, therefore, would see any further weakness in the stock as a potential buying opportunity. Our investment case continues to factor in a relatively strong crude oil market. West Texas Intermediate crude — the U.S. oil benchmark — has climbed by more than 4% since the start of the year, to around $80 a barrel. We are raising our price target on Halliburton to $48 a share, up from $44, while maintaining our two rating on the stock — meaning we would wait for a pullback before buying . Outlook Halliburton’s management said Tuesday that business on the ground “points towards continued oil-and–gas tightness.” This has resulted in a nearly 50% increase in supply side spending in the U.S., with activity growth of almost 30%, ultimately amounting to a roughly 5% increase in production. Management expects “activity to remain strong and service intensity to increase through 2023.” The team noted similarly tight dynamics in international markets, saying several members of the Organization of Petroleum Exporting Countries (OPEC) failed to meet their production quotas in in 2022. Meanwhile, the team expects demand to remain resilient in 2023, boosted by China’s economic reopening. Longer term, “only multiple years of increased investment in both stemming declines and reserve additions will solve [the] short supply” of oil and gas globally. In management’s view, the investments needed to bring supply and demand into balance “will drive demand for oil-field services [for] the next several years.” Capital return initiatives Management on Tuesday announced a 33% increase to the stock’s quarterly-dividend payout, to 16 cents per share, while saying the company would resume stock buybacks under the existing board authorization of roughly $5 billion. The team repurchased $250 million worth of shares in the fourth quarter. Moreover, the board approved a capital return framework that will allow management the ability to return at least 50% of annual free cash flow via dividends and buybacks going forward, similar to what we’ve seen at the Club’s other energy holdings. Management attributed the overall improvement in operating margin year-on-year to increased global activity, higher pricing and year-end product-and-software sales. The completion-and-production unit delivered its strongest operating margin performance since 2012, expanding to 20.7%, “due to improved pricing, service efficiency and activity mix in North America land, as well as increased activity in international markets.” The drilling-and-evaluation segment reported a margin improvement of 210-basis points on an annual basis. (Jim Cramer’s Charitable Trust is long HAL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.