Halliburton a value, Schlumberger pricey

By Anna Driver - Analysis

HOUSTON (Reuters) - Concerns about Halliburton Co's (HAL.N) exposure to the North American natural gas market have caused investors to favor its larger oil field services rival, Schlumberger Ltd (SLB.N).

But analysts say investors have been overly pessimistic about Halliburton and should note its efforts to expand internationally, as well as benefits from the divestiture of its engineering and construction unit, KBR Inc (KBR.N).

In recent months, near record-high inventories of natural gas have depressed prices and weighed on shares of oil service companies with large markets in North America. Natural gas futures traded on the New York Mercantile Exchange have fallen about 20 percent since peaking in May.

Also, intense competition in pressure pumping -- which energy companies use to increase production of natural gas from hard-to-reach pockets in substances like shale -- has weighed on prices in the United States.

The world's largest oil services company, Schlumberger is trading at a price-to-earnings ratio (P/E) of 19.5 times estimated 2008 earnings, Halliburton at a ratio of 12, and third largest firm Baker Hughes Inc (BHI.N) at a P/E multiple of 14, according to data from Reuters Estimates.

"I don't think I've ever seen as big a multiple between Schlumberger and Halliburton before," said Mark Urness, an analyst with Calyon Securities. "Schlumberger merits some premium, but it's certainly trading at the upper end of its range."

Urness has a "neutral" rating on Schlumberger.

Schlumberger has a P/E premium to other service companies partly because of its fast-growing seismic business WesternGeco and its greater exposure in international markets, where prices have stayed firm and growth prospects are seen as the best, analysts said.

Even so, Urness cautioned that there is no near-term catalyst to lift Halliburton, except perhaps a very cold winter that would boost natural gas demand. He prefers Weatherford International Inc (WFT.N), which trades at a P/E multiple of 14, according to Reuters Estimates.

In a note to clients on Monday, Tudor Pickering characterized Halliburton as "too cheap."

"No disputing U.S. stimulation pricing will keep getting worse, but Halliburton (is) being overly punished for about one-quarter of its profits coming from that business. International business (is) cruising along," the Tudor Pickering note said.

In March, Halliburton announced plans to open a headquarters in Dubai in a bid to capture more business in the fast-growing Eastern Hemisphere.

In recent comments to investors attending the Lehman Energy/Power Conference, Halliburton Chief Executive Officer Dave Lesar said the move will "pay dividends in the long run," and added it was exposing the company to more customers.

Deutsche Bank analyst Mike Urban told clients he expects Halliburton's valuation gap to narrow because the stock is oversold. It has also divested engineering and construction company KBR Inc (KBR.N), which was a drag on the parent's profitability, he added.

KBR, which is the Pentagons' largest contractor, became a separate company in April as part of Halliburton's plan to focus on its more profitable oil services business.