With the 2014 tax year ending in April, I’ve been adding to my 401k and other tax sheltered accounts. As a result, my capital availability for dividend stocks has been a little light. But, I just can’t just sit idle and watch as the market dips without adding a new position!
One sector I’ve been keeping my eye on has been energy, and oil in particular. Crude oil has dropped below $50 a barrel and investors are getting a little bearish on oil and gas firms. As a result, there are a number of oil production and service companies that are available at great bargains compared to the wider market.
One stock I’ve been keeping an eye on these past few months has been Halliburton (HAL). I even made the video below on HAL last month.
Overall, HAL remains one of the largest oil service companies in North America generating $4.72 billion in revenue. In fact, their total revenue increased by 21.72% from Q3’13 to Q3’14. As well as doing great on the financial and operational front, HAL got their M&A on and recently agreed to acquire Baker Hughes in a $34.6 billion deal, which is expected to close in the second half of 2015.
So, what’s been going on? Well, it all comes down to supply and demand. As of late, North American shale fields have increased their supply while Saudi Arabia and OPEC have refused to cut crude production in response. This has led to increased supply without a complementary increase in demand, resulting in increased competition and lower prices. As a result, crude oil prices have declined close to 50% over the last six months and is now sitting below $50 a barrel.
With lower oil prices, oil production companies are expecting lower revenue numbers and cutting back their operational expenses, which directly impacts oilfield service companies, like HAL. So, as of right now, the wider market is taking a bearish stance and believes crude oil prices will continue to stay low, hence the sector wide sell off.
So, why buy? Well, it’s because we are long term investors! Energy is a cyclical sector and it would be a black swan if crude oil prices don’t recover over the course of the next decade. So, time to pick up some shares on the cheap and sit back as we watch oil recover. It may not be in 2015, or even 2016, but at some point it will and the blue chip oil companies will be soaring like 3 years ago. Having said that, I’m going to go ahead and bet on oil and try to allocate as much capital as I can over the next few months.
Having said that, I recently purchased 20 shares of Halliburton (HAL) at $38.55 in my OptionsHouse account. HAL pps (price per share) has slid over 44.28% over the last six months and has a reached a valuation where I feel comfortable initiating a position. Along with a low P/E of 9.89, HAL offers a 1.88% dividend yield while having a payout ratio of only 18%, which allows for plenty of room to increase dividends in the future. In fact, they recently increased their dividend by 20% from .15 to .18.
I’m extremely happy with this purchase and look forward to watching how HAL performs over the next decade or so. Along with this purchase, I’m hoping to pick up some more energy companies over the next few months, depending on crude oil price and how the sector reacts.
Thanks for reading, Sam
Full Disclosure: Long HAL
What do you think of HAL? Is it attractively priced?