Should Halliburton Company (HAL) Worry About Its Exposure To Venezuela?


Halliburton Company (NYSE:HAL) is in the midst of some news. For instance, the Department of Justice filed a suit to block the merger between the company and Bakers Hughes Incorporated (NYSE:BHI). As a result, the regulator providing its approval has become dim now, and there is a threat of a termination fee. The company is also dependent on Venezuela, and the receivables from there are a cause for worry. However, it is not the only company others like Weatherford International Plc (NYSE:WFT) are also affected by it. Even as the debate is raging on the quantum of exposures by different companies in Venezuela, Morgan Stanley (NYSE:MS) boosted its price target on Halliburton to $52 and rated oilfield services stock as Overweight. Now, the question is whether the company could withstand the pressures of the region or worry about it. Let’s us look at them.

Exposure Of Different Firms To Venezuela

Halliburton Company (NYSE:HAL) should be watching other firms like Schlumberger Limited (NYSE:SLB), Baker Hughes Incorporated (NYSE:BHI) and Weatherford International Plc (NYSE:WFT) as to what they do since they too have significant exposures to Venezuela. Most recently, Schlumberger indicated that it was scaling down its operations in the region blaming the slow payments from the State Oil Firm, PDVSA. Interestingly, it generated 3% of its total revenue from the region. Still the company has more than 10% of its receivables, and that made the company take a hard decision. Its total receivables are about $8.8 billion. The problem is not restricted to one company but to those who have been exposed to the region.

Let’s also look at the exposures of other companies. Halliburton Company (NYSE:HAL) also generated about 3% of its total revenue in the last year. Significantly, its accounts receivable exposure is more than $700 million. This accounted for 13% of its total $5.3 billion receivables. If compared with Schlumberger, the total receivables are less and because of which the percentage of exposure looks bigger in respect of Halliburton. Similarly, Baker Hughes Incorporated (NYSE:BHI) is exposed to 2% of its total revenue in the last year. The details about total account receivables were not available. Weatherford International Plc (NYSE:WFT) generated 4% of its total revenue in 2014. The company’s accounts receivable exposure to Venezuela is only $205 million though it accounted for 12% of its total receivables of $1.8 billion.

DOJ Plays Spoil Sport

For Halliburton Company (NYSE:HAL), the situation would have been a normal one and sailed smoothly. That was primarily because it had enough cash on hand. Reports suggested that it had about $10 billion. On top of this only, there is $5.3 billion balance receivable. Therefore, it should not have been an issue at all to manage with enough liquidity to face any further downside risks in the oil and gas industry. With the available cash on hand, the company could even write-off the over $700 million receivables from Venezuela. However, the Department of Justice entered the scene to play a spoil sport in the company’s calculations. The DOJ filed a suit before the court seeking to block the merger with Baker Hughes Incorporated (NYSE:BHI).

As a result, there is a threat Halliburton Company (NYSE:HAL) will not be able to get the regulatory approval in the United States. The situation is not bright either in the European Union where the regulators are planning to tell the two companies that their merger would hurt competition. The regulators pointed out that the merged entity would only compete with Schlumberger Limited (NYSE:SLB) in twenty business lines in the international well drilling, as well as, construction services of oil industry.

Threat Of Cancellation Fee Looms Large

Therefore, more than the exposure to Venezuela, Halliburton Company (NYSE:HAL) is facing a bigger threat of a termination fee running into billions. The company would be forced to shell out $3.5 billion or $2.6 billion after-tax as break-up fee to Baker Hughes Incorporated (NYSE:BHI). That is four times bigger than the Venezuela exposure or the amount receivable from the region. Also, it would reduce the cash on hand significantly, probably by 35%. In fact, that is one of the reasons several analysts have started boosting their price target on the company. On top of that, most of them have also upgraded the stock.

Analyst Views

Meanwhile, Wells Fargo & Co (NYSE:WFC) has commented about oil prices and spending towards exploration and production. At the end of the first quarter, the brokerage said the E&P spending remained intact mostly and that the landscape for bigger cap service universe has turned into more interesting after the blocking of Halliburton Company (NYSE:HAL) merger with Baker Hughes Incorporated (NYSE:BHI) and few other deals in the sector. Though the brokerage trimmed their EPS estimations to reflect weakness and weak margins in the near-term, its analyst believes that the stage has set for the big-cap firms to recover. The analyst said that the prospects for every firm in the sector were driven by company-specific factors apart from cyclical issues.

Wells Fargo & Co (NYSE:WFC) said that its stock rankings were more towards bigger companies since its analyst see premium valuation to be accorded through the cycle. That means the brokerage has moved stand-alone Halliburton Company (NYSE:HAL) to its top pick. That clearly suggested that the issue of Venezuela is not a big issue to bother though it would remain a concern.

Conclusion

As far as Halliburton Company (NYSE:HAL) is concerned, the receivables from Venezuela is not a big thing to worry about it. More than that, the merger cancellation fee will hit it hard. However, the stand-alone benefit should off-set the termination charges over a period of time. The associated risks with the oil and gas industry continued to be there, and there are not many changes. Therefore, if the investor can wait for returns on a long-term basis, then the stock is worth.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.
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