Why the Downgrade?
Houston, Texas based Halliburton continues to be plagued by sluggish North American operations, a spike in the costs for guar gums, and potential liability exposure to the Deepwater Horizon rig disaster.
The North American land rig count may plateau in the near future as growth in highly-productive horizontal drilling has led to a natural gas supply overhang and relatively weak natural gas prices in the U.S. market. This is likely to be only partially offset by the continued growth of oil- and liquids-rich reservoirs. A slowdown in U.S. land drilling will impair Halliburton's business.
A substantial relief in the cost for guar gum - a key constituent of the company's market-leading hydraulic fracturing ('fracking') procedure - is not expected until well into 2013.
We remain concerned over the ensuing uncertainty regarding Halliburton's potential liability exposure to the Deepwater Horizon rig disaster. A final assessment report issued by the federal government in September 2011 blamed the company for the 'poor cement job' that allowed the oil/gas to burst through the reservoir and reach the rig, causing the explosion. We believe this has raised the probability for Halliburton to share in at least a portion of the spill liabilities with British energy giant BP plc ( BP ).
Stocks That Warrant a Look
While we expect Halliburton to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at Compressco Partners L.P. ( GSJK ) and Exterran Partners L.P. ( EXLP ) as good buying opportunities. These energy equipment makers - sporting a Zacks Rank #1 (Strong Buy) - have solid secular growth stories with potential to rise significantly from current levels.