Can Halliburton Stock Return To Its Pre-Inflation Shock Highs?

Halliburton stock (NYSE: HAL), an energy company organized into the exploration, development, and production of oil and natural gas, currently trades at $33 per share, around 24% below its level of $43 seen on June 8, 2022 (pre-inflation shock high), and has the potential for further gains. HAL saw its stock trading at around $23.31 at the end of September 2022, when the Fed kept increasing rates, and now remains 40% above those levels. In comparison, the S&P 500 gained about 21% during this period. Halliburton generated significant returns in 2022 but the company’s stock has dropped since the peak in January 2023. This is because oil and natural gas prices have been dropping steadily since the start of 2023. We do not expect another stellar year in 2023, but rather a moderate one assuming commodity prices will stabilize soon. That said, HAL also did not generate any free cash flow in Q1 2023, showing that the business has cooled down from the 2022 highs.

Returning to the pre-inflation shock level means that Halliburton will have to gain about 32% from here. While it has the potential to recover to those levels, we estimate HAL’s Valuation to be around $41 per share, about 21% above the current market price. This is because the recent uncertainty has made investors concerned about a potential recession. 

Our detailed analysis of Halliburton’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses

In contrast, here’s how HAL stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

HAL and S&P 500 Performance During 2007-08 Crisis

HAL stock declined from nearly $39 in October 2007 (pre-crisis peak) to $16 in March 2009 (as the markets bottomed out), implying that HAL stock lost almost 58% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $30 in early 2010, rising roughly 85% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

HAL Fundamentals Over Recent Years

HAL revenues declined from around $22.4 billion in 2019 to about $14.4 billion in 2020, due to the impact of Covid-19. However, sales rose back to $20.3 billion in 2022, as demand picked up. Earnings per share were in the red in 2019 and 2020 but improved to $1.74 in 2022. Higher oil and gas prices gave producers the confidence to increase their capital spending which drove demand for the company’s equipment and services in 2022. That enabled the oil-field services giant to produce growing free cash flow – which was used to strengthen its balance sheet and return additional capital to shareholders through a higher dividend and the resumption of its share repurchase program. In Q1 2023, Halliburton’s revenue increased by 33% compared to the first quarter of 2022 with strong activity in both North America and international markets. Also, the company’s operating income grew 91% year-over-year (y-o-y).

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Halliburton stock has the potential for strong gains once fears of a potential recession are allayed.

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[1] Month-to-date and year-to-date as of 6/20/2023
[2] Cumulative total returns since the end of 2016

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