HAL: Undervalued by at Least 33%

The company also said, due to production movement away from lower-profit gas operations, the number of active oil rigs in the U.S. climbed to a 25-year high. For the quarter, there was a 12% increase in the average number of active rigs drilling for oil in the U.S., while gas rigs fell 17%. The company also reported growth of 35% to $4.3 billion of its completion and production segment -- a part of the business that provides stimulation and cementing services. The company said the growth was due to demand for pressure-pumping services in the U.S. land market.

Those were the positive sides of the report. On the less than stellar side, I did notice a decline of 3% in revenue from the previous quarter -- albeit not a huge number, but significant enough to be noticed. Also of some concern was the margin was unimpressive and showed a decline from the previous quarter. However, when considering the fact that rival Baker Hughes(BHI) previously issued an earnings warning due to supply chain issues, Halliburton's overall performance should be considered a success.

Moving Forward

As I have said previously, there is without question tremendous value at current levels and from an earnings standpoint, it continues to steadily demonstrate an ability to beat expectations and deliver on its bottom line. When looking at the company's low price-to-earnings ratio of 10, it really becomes a challenge to not see the tremendous value that is presented -- particularly for the fact that the stock is down almost 40% since its 52-week high of last summer. For that matter, the entire sector has come under scrutiny due to what I consider overblown concerns regarding natural gas and fears related to production.

Bottom Line

Making an investment case for Halliburton really comes down to the realization that the world population will continue to grow. With that in mind, it stands to reason that demand for oil and gasoline will also rise commensurate to that growth. When one considers the fact that there is an increase in worldwide deepwater drilling and that production from North American shale does not appear to be slowing, it further affirms that the stock is being underappreciated.

Value investors should certainly make a play at current levels. Fair market value for the stock appears at least 33% higher, in the mid-$40s.